Brotherhood of St Laurence v Sarina Investments Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S EAPCI 2023 0033

BROTHERHOOD OF ST LAURENCE	Applicant
v
SARINA INVESTMENTS PTY LTD (ACN 056 887 757)	Respondent

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JUDGES:	WALKER, LYONS and WHELAN JJA
WHERE HELD:	Melbourne
DATE OF HEARING:	19 February 2024
DATE OF JUDGMENT:	26 March 2024
MEDIUM NEUTRAL CITATION:	[2024] VSCA 46
JUDGMENT APPEALED FROM:	[2022] VCC 2122 (Judge Macnamara)

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CONTRACT – Lease of commercial premises – Where lessor obliged to ‘maintain building in a structurally sound condition’ – Whether lessor obliged to investigate reasonably‑based concern as to the structural soundness of the building – Where lessee obtained engineering reports recommending further investigations – Where lessor failed to undertake investigations – Obligation breached – Meaning of ‘maintain’ in commercial lease agreement – Appeal allowed in part.

CONTRACT – Repudiation – Serious breach of an intermediate term.

RESTITUTION – Total failure of consideration – Where applicant failed to address whether breach of quiet enjoyment covenant constituted total failure of consideration – Where applicant failed to address whether restitution claim was consistent with terms of agreement.

Hamiltonv National Coal Board [1960] AC 633; Haydon v Kent County Council [1978] QB 343; Ridis v Strata Plan 10308 (2005) 63 NSWLR 449; Greetings Oxford Koala Hotel Pty Ltd v Oxford Square Investments Pty Ltd (1989) 18 NSWLR 33; Seiwa v Owners Strata Plan 35042 [2006] NSWSC 1157, considered; Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115, applied.

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Counsel
Applicant:		Mr P Herzfeld SC with Mr B Petrie
Respondent:		Mr S R Horgan KC with Mr L Virgona
Solicitors
Applicant:	Rigby Cooke
Respondent:	HWL Ebsworth Lawyers

WALKER JA
LYONS JA
WHELAN JA:

The respondent (‘Sarina’) owns a three-level commercial building at 219 Johnston Street, Fitzroy (the ‘Building’). The applicant (‘BSL’) leased level 1, the middle level of the Building (the ‘Premises’) for use as an office pursuant to a lease agreement dated 14 August 2014 (the ‘Lease’). In January 2020, BSL put Sarina on notice that there may be structural issues with the Building and, in March 2020, provided Sarina with a consulting engineer’s report which recommended further investigations by a structural engineer. In November 2020, Sarina obtained its own report from the same consulting engineer, who again recommended further investigations by a structural engineer. Sarina did not undertake any investigations in response to either report.
Following Sarina’s inaction concerning the potential structural issue, BSL contended that Sarina breached:
(a)the obligation in cl 14.4(a) of the Lease to ‘maintain the [B]uilding in a structurally sound condition’ (the ‘maintenance covenant’), which BSL contended included an obligation on Sarina to carry out investigations to confirm whether the Building was structurally sound, having been put on notice of a potential structural issue; and
(b)the obligation in cl 14.1 not to ‘interrupt [BSL’s] quiet enjoyment of the [P]remises during the term’ (the ‘quiet enjoyment covenant’) which BSL contended arose by the uncertainty as to whether or not the Building was structurally sound, which was caused by Sarina’s failure to carry out the required investigations.
BSL relied on these alleged breaches as constituting a repudiation of the Lease and evincing Sarina’s unwillingness to perform the maintenance covenant in order to terminate the Lease. BSL purported to accept Sarina’s repudiation on 3 March 2021. As a result, BSL vacated the Premises at about that time and ceased paying rent.
Sarina denied the alleged breaches and asserted that, by purporting to terminate the Lease, BSL had itself repudiated the Lease. On 18 March 2021, Sarina purported to accept that repudiation. In May 2021, Sarina commissioned a structural engineer to inspect the Premises. In March 2022, after this litigation had been commenced, Sarina commissioned the structural engineer to provide an expert report. That report was provided in April 2022 and concluded that there were in fact no structural issues of the kind BSL feared.
In August 2021, Sarina brought proceedings in the County Court claiming damages for lost rent. BSL filed a defence and counterclaim relying on the alleged breaches as establishing Sarina’s repudiation and claiming damages, including for BSL’s relocation costs and an amount Sarina had drawn down from a bank guarantee following termination of the Lease. BSL also claimed restitution of rent paid during the period BSL alleged it could not occupy the Premises on the basis that there had been a total failure of consideration.
The judge allowed Sarina’s claim,[1] awarded Sarina damages in the sum of $345,521.33 (with interest of $42,313.02 and costs) and dismissed BSL’s counterclaim. Relevantly, the judge concluded that:
(a)the maintenance covenant did not require Sarina to carry out investigations to confirm the Building was structurally sound and, as a result BSL, had not validly terminated the Lease on 3 March 2021 on the basis of the Sarina’s breach of that obligation (proposed ground 1);
(b)as at 3 March 2021, Sarina had not repudiated the Lease by manifesting an unwillingness to comply with the maintenance covenant by failing to carry out investigations to confirm the Building was structurally sound and, as a result, BSL had not validly terminated the Lease on the basis of Sarina’s repudiation (proposed ground 2); and
(c)as at 3 March 2021, Sarina was not in breach of the quiet enjoyment covenant and, as a result, BSL did not validly terminate the Lease on the basis of breach of that obligation (proposed ground 3).
[1]Sarina Investments Pty Ltd v Brotherhood of St Laurence [2022] VCC 2122 (‘Reasons’).
BSL now seeks to challenge those conclusions.
If BSL is successful in relation to proposed grounds 1 or 2, the parties agree that it would be entitled to contractual damages in the sum of $85,000, consisting of an early termination fee paid by BSL to its internet service provider and Sarina’s drawdown of BSL’s bank guarantee.[2]
[2]The application for leave to appeal sought an order for damages of $156,907 plus interest. This included a claim of $96,771.09 in contractual damages consisting of: the costs of the first and third NSIENT reports ($4,000); a ‘decommission and asset storage fee’ ($5,901.09); the early termination fee paid to BSL’s internet service provider ($20,570.00); and Sarina’s early drawdown of BSL’s bank guarantee ($66,300). The remainder of BSL’s claim on appeal consisted of restitution of rent totalling $60,106. However, in oral argument BSL’s contractual damages claim was limited to $85,000.
If BSL is successful in proposed ground 3, it seeks restitution of rent paid to Sarina. This was not the subject of the proposed grounds of appeal, but appears to have been included in the amount of damages in the orders sought in the application for leave to appeal. In its counterclaim, Sarina sought restitution of rent and outgoings it paid between 23 March 2020 and 3 March 2021. During oral closing submissions at trial and before this Court, BSL limited its claim to the period between 18 December 2020 and 3 March 2021 in the order of $60,106.
For the reasons that follow:
(a)we would grant leave to appeal and allow the appeal in respect of proposed ground 1, set aside the orders made by the judge in favour of Sarina below and order that Sarina pay BSL damages of $85,000;
(b)as a result of allowing proposed ground 1, it is not necessary to address proposed ground 2; and
(c)we would not grant leave to appeal in respect of proposed ground 3.

Factual background

It is necessary to set out the facts in some detail to understand the nature and extent of the alleged breaches by Sarina.
The Lease was executed on 14 August 2014 for an initial term of four years with an option to renew for a further four years to 31 July 2022, which was exercised on 1 August 2018. In addition to the Premises, the Lease conferred on BSL the exclusive entitlement to use and occupy an adjoining terrace (the ‘Terrace’). Although the Terrace did not form part of the ‘lettable area’ under the Lease, the Lease provided that its terms applied to the Terrace ‘as if part of the grant of the [L]ease’.
Clause 14 of the Lease, headed ‘Lessor’s Covenants’, contains the maintenance covenant and the quiet enjoyment covenant. First, cl 14.1, headed ‘Quiet possession’ provides:
Subject to the rights reserved to the lessor under this lease, if the lessee performs and observes its covenants, the lessor must not interrupt the lessee’s quiet enjoyment of the [P]remises during the term.
Clause 14.4, headed, ‘Repair and maintain building’, provides:
The lessor:
(a)must maintain the [B]uilding in a structurally sound condition and endeavour to keep it wind and water tight;
(b)[m]ust use best endeavours to keep the lessor’s property, building services, plant and essential services in, or to, the [B]uilding in good working order and available to the [P]remises at all times; and
Is responsible for all capital and structural repairs to the [B]uilding and [P]remises, whether or not such repairs are required due to damage or defect incurred during or prior to the Lease (except to the extent that such repairs are required due to fault or negligence of the lessee).
The parties agreed at trial that the ‘tailpiece’ of cl 14.4 (commencing ‘is responsible for all capital and structural repairs …’) was to be read as a standalone sub‑paragraph (c) which we will refer to as the ‘repair covenant’. Sarina also accepted that its obligations in relation to the “building” in cl 14 extended to the whole of the Building in which the Premises is situated.
BSL used the Premises as headquarters for various community programs where approximately 49 employees worked from time to time. Pursuant to s 21 of the Occupational Health and Safety Act 2004, BSL was required to ensure that the Premises constituted a working environment that was safe and without risk to health (the ‘OH&S obligation’).
Sarina employed Mr Mahmood Hussein as its property administrator and Mr Hussein was BSL’s point of contact with Sarina. Mr Hussein’s authority to approve expenditures in relation to the Building was capped at $500. However, BSL was never advised of Mr Hussein’s limited authority or that the ultimate decision making power to approve expenditures in excess of $500 lay with Sarina’s principals, Mr Andrew Neill and Mr Andrew Pennisi.
On 24 January 2020, BSL discovered damage to the exterior wall of the Premises facing onto the Terrace and that concrete debris had fallen onto the ground (the ‘Terrace Damage’). On that day, BSL restricted access to the Terrace and emailed Mr Hussein describing the Terrace Damage, attaching photos and requesting that a contractor conduct an inspection ‘to ensure the wall is structurally sound’. After a follow-up email, Mr Hussein responded on 30 January 2020, noting that Sarina had a technician on site ‘over the past few days’ to provide a scope of works and quote, and that Sarina was ‘looking at arranging a make safe and will get back to [BSL] once we have a solution in concrete’. However, Sarina did not get back to BSL. From around this time, BSL cordoned off the Terrace.
On 4 March 2020, Ms Melinda Illevold, the Senior Manager of Facilities & Assets at BSL sent an internal email in which she stated that the ‘render cladding falling away … will not impact the integrity of the wall itself but never the less [sic] could cause injury if a person stands in the area’. The judge found on the basis of this email that ‘even before carrying out an onsite inspection, Ms Illevold was satisfied that there was no structural issue relative to the wall’.[3] BSL disputes this characterisation.
[3]Reasons, [111].
On 5 March 2020, Ms Illevold telephoned Mr Hussein and expressed her concern about the delays, complained that BSL had not received a scope of works and raised concerns about falling concrete debris. Ms Illevold gave evidence that Mr Hussein informed her that Sarina was in receipt of an engineering report in relation to the Terrace Damage (which the parties have referred to as the ‘undisclosed engineers report’). Mr Hussein denied this and said that he told Ms Illevold he was awaiting a scope of works and quote. However, later that day, Ms Illevold sent Mr Hussein an email confirming their conversation which stated that ‘[t]he defects… are of significant concern’ and requested Sarina provide a copy of ‘the engineers report’ so that BSL could ensure the Premises were ‘fit for purpose’. The email also requested Sarina provide a timeline for scheduled remediation works as a matter of urgency. Sarina did not reply to this email.
On 18 March 2020, BSL obtained an independent engineer’s report from NSIENT Consulting Engineers (‘NSIENT’ and the ‘first NSIENT report’) which stated that ‘the loose render, tiles and grout at the edge of the slab are a hazard and may cause injury to the users of the [Terrace] if they become fully dislodged and fall. All loose render and tiles should be removed immediately along the edge of the Level 2 Balcony’.
The first NSIENT report also provided that:
(a)‘[i]t appears that movement has occurred in the slab at the Eastern end of the Level 2 Slab resulting in the Level 2 Balcony tiles and grout overhanging the slab edge by approximately 30mm’; and
(b)‘the cause of the movement is not clear at this stage and further investigation will be required’.
The first NSIENT report concluded:
The following items should be undertaken in an immediate to short term to further investigate the likely cause of the movement;
·The tiles and grout on the Level 2 Balcony should be removed for an extent of 1.0m from the slab edge in order to expose the underlying superstructure to enable this to be inspected by a Structural Engineer.
·The tiles and grout should also be removed for an extent of 1.0m each side of where the tiles have popped up in the middle of the Level 2 Balcony in order to expose the underlying superstructure to enable this to be inspected by a Structural Engineer.
·The Level 2 floor should be surveyed in order to assist in determining the direction and amount of movement that may have occurred. The survey results should be provided to a Structural Engineer for review in order to assist in determining the likely cause of the movement.
·The Structural Drawings should be provided to a Structural Engineer in order to confirm the structural system of the building and to assist in determining the likely cause of the movement.
·An extended visual inspection of the Level 2 slab soffit along the Eastern edge of the building should be undertaken to inspect for any cracking at the connection of the slab soffit to pre-cast panel connection.
·The movement may also be a result of thermal and/or expansion due to water absorption of the tiles. We did not observe any expansion joints in the tiles along the Level 2 Balcony. The location of any expansion joints in the tiles of the Level 2 Balcony should be picked up on the survey indicated above.
For convenience, we will refer to the ‘slab at the Eastern end of the Level 2 Slab’ described in the first NSIENT report as the ‘roof slab’.
On 18 March 2020, Ms Illevold emailed the first NSIENT report to Mr Hussein and sought to discuss its contents the following day. In our view, this email was, in light of the earlier communications relating to the Terrace Damage, a request by BSL for Sarina to undertake the recommended repairs and investigations in the first NSIENT report in relation to the potential structural issues raised in that report. It appears that from 18 March 2020, BSL cordoned off access to approximately 50 square metres of office space adjacent to the Terrace.
On 23 March 2020, BSL directed staff not to attend the Premises. Ms Illevold gave evidence that this direction was given out of a concern relating to the structural integrity of the Building and because BSL was not prepared to put its staff in a potentially hazardous space. However, some staff who worked from the Premises were informed that the reason not to attend was due to concerns relating to COVID-19. Ms Illevold gave evidence that this reason was given to some staff because she expected the damage to be remediated in the short term so there would be no need to make staff feel nervous about working in the space.
On 29 May 2020, Ms Illevold sent a follow-up email to Mr Hussein seeking an update on the repair works. No substantive response was provided. Ms Illevold sent a further email on 19 June 2020 reiterating that BSL had ‘lost use of part of the office due to the defective building’ and attaching another copy of the first NSIENT report. Ms Illevold requested an update on when the repairs were scheduled and noted that despite continual follow‑ups, she had yet to be provided with ‘any assurance that [Sarina] is planning to action the request’. In our view, viewed in the context of the other communications referred to above, this was a request to undertake the recommended repairs and investigations in the first NSIENT report set out above. Apparently receiving an ‘out‑of‑office’ response to this email, Ms Illevold then forwarded it to Mr Arjun Sharma, Fleet and Property Administrator at Sarina who was asked to respond in Mr Hussein’s absence. In her email to Mr Sharma, Ms Illevold noted that the issue had been unresolved since January 2020 and requested a response by close of business on 22 June 2020.
Once again, no substantive response was provided. We note that Mr Sharma replied on 19 June 2020. He cited COVID-19 as the reason for the delays and advised that ‘managers’ were looking into the issue and an update would be provided once Mr Hussein returned to work on 23 June 2020. In response, Ms Illevold indicated that she did not accept that COVID-19 was the reason for the delays and noted that the building industry had worked throughout COVID-19 and that BSL had undertaken major repairs to sites since COVID-19 restrictions had been imposed. Ms Illevold stated that she awaited a response by 24 June 2020, expressing her surprise that nothing had been done because the condition of the Premises was a ‘safety hazard’. When no reply was received, she wrote a further email on 24 June 2020 advising the matter would be escalated if no reply was received by 12:00pm on 25 June 2020.
On 8 July 2020, Ms Illevold sent a further email which noted no update had been received and requested details of Sarina’s legal counsel. That email also referred to the contractual obligations under the Lease and to BSL’s obligations to ensure its workplace was safe before becoming operational after COVID-19 restrictions came to an end. It also referred to ‘the structural engineers report’ which ‘advises that it is not safe with the current damage to building [sic]’. It appears this was a reference to the first NSIENT report. No response was provided to this email. In our view, viewed in the context of the other communications referred to above, this email was another request to undertake the recommended repairs and investigations in the first NSIENT report set out above.
On 9 October 2020, the solicitors for BSL (‘RCL’) wrote a letter to Sarina which:
(a)repeated concerns that the cause of the building damage was movement in the horizontal slab and the need for further investigations based on the first NSIENT report;
(b)noted that while staff had not been attending the Premises due to COVID‑19 restrictions, BSL intended for staff to return from early December 2020;
(c)referred to the fact that Sarina was in receipt of the undisclosed engineers report and that Sarina had previously advised that a technician would be providing a scope of works and quote;
(d)noted that, as a result of the Terrace Damage, since 18 March 2020, BSL had cordoned off approximately 50 square metres of office space in the Premises;
(e)alleged that Sarina’s failure to repair the damage was in breach of the maintenance covenant;
(f)demanded that, by 16 October 2020, Sarina:
(i)provide a program of works to repair the damage by 13 November 2020;
(ii)provide copies of any engineering reports it had received in respect of the building damage; and
(iii)provide written confirmation that the Premises were then currently structurally sound for occupation.

In our view, the demand in this letter for written confirmation that the Premises were then structurally sound for occupation was another request to undertake the recommended repairs and investigations in the first NSIENT report set out above.
On 16 October 2020, Sarina’s in-house counsel, Mr Ormesher, responded by email asserting that Sarina had been ‘dutifully approaching the issue of the repairs of the Building Damage’. The email gave two reasons why the repairs of the Terrace Damage had not been undertaken, namely the ‘Stage 4 restrictions’ and the fact that the ‘Body Corporate’ had not provided the necessary approvals to permit the repairs to be undertaken. The latter reason was false: Mr Ormesher gave evidence at trial that Sarina never sought owners corporation approval to carry out any works, and the owners corporation had never denied such approval.
Mr Ormesher’s email did not respond to the requests for the undisclosed engineers report or confirmation that the Premises were structurally sound. However, Sarina offered to provide a rental credit of $4000.
On 5 November 2020, Sarina wrote to BSL:
(a)advising that builders had attended the Premises in preparation for the commencement of works and that the works would be ‘completed and signed off by our structural engineer’ by the end of November 2020; and
(b)reiterated that the delay in carrying out repairs was due to COVID-19 restrictions.
We note here that Sarina did not attempt at trial or before this Court to establish that COVID-19 restrictions would have prevented the recommendations in the first NSIENT report being carried out.
Later in November 2020, Sarina undertook remediation works in relation to the Terrace Damage. The fallen plaster on the wall of the Terrace was repaired and the tiles on the edge of the level 2 balcony were removed. However, Sarina did not undertake any investigation or works in relation to the potential structural issue identified in the first NSIENT report.
On 26 November 2020, Sarina obtained a further report from NSIENT (the ‘second NSIENT report’). As is evident, Sarina engaged the same consulting engineers who had prepared the first NSIENT report raising concerns about movement of the roof slab and recommending further investigations.
The second NSIENT report confirmed that the Terrace Damage had been repaired and made safe. It also repeated the observations in the first NSIENT report that ‘the cause of the movement is not clear at this stage and further investigation will be required’ and recommended that Sarina should undertake a series of further steps in the ‘immediate to short term to further investigate the likely cause of the movement’.
The recommendations in the second NSIENT report corresponded almost exactly with the second to sixth recommendations in the first NSIENT report set out above at [23], which Sarina had not instructed NSIENT (or any other engineer) to action. The second NSIENT report also contained a further recommendation, namely, to regularly inspect the balcony edge to ensure the temporary render patching has not become loose by further movement.
On 16 December 2020, RCL wrote to Sarina demanding that the investigations identified in the first and second NSIENT reports be undertaken and requesting a copy of the undisclosed engineers report.
Sarina replied on 18 December 2020, asserting that:
(a)‘removal of the loose render, tiles and grout at the edge of the slab above the common area terrace has been duly completed’;
(b)the second NSIENT report confirmed the Terrace ‘is now considered to be safe’;
(c)Sarina’s property team had confirmed that the Premises remained fit for occupation by BSL, which ‘has unfettered access to the Premises’; and
(d)Sarina would take on any recommendations regarding the upkeep of the Building and further investigations ‘with further engagements ensuing in the new year’ in respect of which Sarina would keep BSL updated; and
(e)the Premises were fit for occupation by BSL and there were no reasonable grounds for BSL to consider the Premises was unfit for occupation.
This email addressed the repairs of the Terrace Damage. However, it did not address the concerns relating to structural issues in any meaningful way. The email clearly discloses that no steps had been taken to investigate the existence or possible causes of movement in the roof slab raised in the first NSIENT report, despite the extensive communications from BSL in relation to this issue in the course of 2020 set out above. Mr Ormesher’s comment to the effect that recommendations and further investigations had ‘been taken on by [Sarina] with further engagements ensuing in the new year’ discloses that even by this time, Sarina did not consider investigations of possible structural issues urgent. This is further demonstrated by the fact that there were no further updates from Sarina prior to March 2021. Indeed, there were no further communications at all between the parties until RCL wrote to Sarina on 3 March 2021.
On 5 February 2021, BSL obtained a further report from NSIENT (the ‘third NSIENT report’). The third NSIENT report noted that only one of the recommendations in the first NSIENT report had been complied with, noting that the intention of the recommendations ‘was to determine the cause of the cracks’ and that similar recommendations were made in the second NSIENT report. The third NSIENT report concluded:
It is still not clear why the cracks have occurred or why they were so large. It is not clear if the loose render was a local problem caused by any number of minor construction issues or if it is an indication of a significant failure within the structure and/or an indication of significant movement or distress in the structure. In my opinion it is not clear if there is still a risk of injury to the tenants without further investigation.
A report confirming that the building is safe for staff to return to work can’t be provided when the cause of these significant cracks still remains unknown.
On 3 March 2021, RCL wrote to Sarina (the ‘3 March 2021 letter’) noting the failure of Sarina to take any action in relation to the Terrace Damage until November 2020 and its failure to take any action at all to identify and resolve the cause of any movement of the roof slab in order to ensure the safety of the Premises. The 3 March 2021 letter disclosed that BSL had sought certification from NSIENT that the Premises were structurally safe without the works NSIENT recommended having occurred. The 3 March 2021 letter also enclosed the third NSIENT report. The letter asserted that Sarina’s failure to action the first and second NSIENT reports’ recommendations evinced Sarina’s unwillingness or inability to perform the Lease and constituted repudiation, which BSL purported to accept.
The 3 March 2021 letter also demanded the refund of all rent and outgoings paid by BSL between April 2020 and February 2021 on the basis that Sarina had breached cl 16.1 of the Lease. Clause 16.1 provided for the suspension of rent in certain circumstances where the Building was damaged and rendered physically unfit for use by the lessee. BSL’s amended defence and counterclaim in the County Court proceeding made no claim under cl 16.1.
By letter dated 18 March 2021, Sarina’s solicitors responded to RCL, denying Sarina had repudiated the Lease and asserting that BSL’s purported termination of the Lease was itself a repudiation which Sarina accepted.
It appears that in about May 2021, Sarina engaged Mr Ian Flanders, a structural and civil engineer, to conduct an inspection of the Premises. Mr Flanders produced a report dated 17 May 2021. That report records that Mr Flanders’ firm, Clive Steele Partners Pty Ltd, were the original structural and civil engineers for the Building and were involved in its construction. In the report, Mr Flanders concluded that, based on his investigation (including a site visit on 10 May 2021) and his knowledge of the original construction, he saw ‘nothing of structural concern … the dislodgement of the balcony tiles/render is a result of expansion/contraction of the tiles due to no tiling expansion joints existing’. The cost of the report was $2,640. Mr Flanders confirmed at trial that it was relatively easy for him to conduct the investigations that he did.
In March 2022, Sarina commissioned Mr Flanders to provide an expert report for the purpose of the County Court proceeding. Mr Flanders prepared a report dated 7 April 2022 (the ‘Flanders report’) which was served on BSL on the same date. The report provides that, in Mr Flanders’ opinion:
(a)the Terrace Damage was caused by a lack of expansion joints;
(b)there were no issues in relation to the structural stability of the Terrace or the roof slab; and
(c)there was no structural risk to Building tenants from the roof slab or Terrace.

The judge’s reasons

The judge set out a detailed factual narrative (which is not challenged) and a summary of the allegations pleaded in the County Court proceeding.[4] The judge then made findings in respect of Sarina’s dealings with BSL, concluding that Sarina’s conduct towards BSL was a ‘sad story of rank discourtesy’ with BSL being “‘strung along” with promises of action and investigation’.[5]
[4]Reasons, [1]–[108].
[5]Reasons, [109].
We agree with the judge’s conclusions in relation to Sarina’s conduct. The chronology set out above reveals Sarina’s delay, avoidance, obfuscation, and untruths in relation to addressing the recommended repairs and investigations in the first NSIENT report. Nevertheless, the judge emphasised that the legal question was whether Sarina’s conduct constituted repudiation.[6]
[6]Reasons, [109]–[110].
The judge also made findings as to the existence of any structural defect. He concluded that, while BSL had concerns about possible structural issues on the basis of the first NSIENT report, there was in fact no structural defect of the type feared by BSL at any relevant time. This finding was based on the Flanders report, which is not challenged in this Court. In doing so, the judge noted that the NSIENT reports were not tendered as evidence of the correctness of the opinions expressed in them but as part of the narrative of events. As a result, the judge concluded that BSL’s case depended upon whether the manner in which Sarina responded to BSL’s complaints constituted repudiation.[7]
[7]Reasons, [111]–[115].
The judge then set out the parties’ submissions relating to the principles of repudiation. The judge stated that to determine whether Sarina had repudiated its obligations under the Lease, it was necessary to first determine what its obligations as to repair and maintenance were.[8]
[8]Reasons, [116]–[126].
The judge then considered whether cl 14.4 required Sarina to carry out investigations to confirm the Building was structurally sound. The judge rejected BSL’s contention that the maintenance covenant in cl 14.4 extended to an obligation to obtain a structural engineer’s report and/or to provide that report to BSL. This was because the judge concluded that none of the authorities indicated that ‘an obligation to maintain simpliciter carries with it an obligation to obtain expert reports’ and there was no reliance upon any alleged implied term that would enlarge the maintenance covenant in cl 14.4.[9]
[9]Reasons, [138]–[141].
The judge was fortified in this conclusion by the fact that it was, in his view, not uncommon for leases to contain requirements for the provision of reports. The judge considered that these typically arise in connection with provisions restricting a lessee’s entitlement to carry out alterations to leased premises without the lessor’s consent. The judge considered that, had a regime of mandatory engineering reports been agreed by the parties, ‘express provisions along those lines could have been inserted in the lease’.[10]
[10]Reasons, [141].
Further, the judge concluded that BSL’s analysis of the obligations in cl 14.4 ‘assumes that all structural defects are preceded by a period of deterioration which the duty to maintain should ensure do not progress towards becoming actual defects.’ The judge concluded that ‘there must be potential instances where the structure is sound at one time and, after a single event, becomes unsound and in need of repair’.[11]
[11]Reasons, [142].
The judge then considered whether Sarina had breached the quiet enjoyment covenant on the basis of BSL’s submission that ‘in the events that occurred the whole of the tenancy was unfit for use and therefore denied to the lessee’. We pause to note that counsel for BSL before the judge appeared to concede in closing submissions that the whole of the tenancy had to be unfit for use for the quiet enjoyment covenant to be breached. The judge considered that no such finding should be made, as acceptance of the evidence of Mr Flanders entailed the conclusion that there was never a risk that the ceiling or roof slab of the Premises would collapse. The judge noted that only a small percentage of the office space was taped off following the Terrace Damage, representing 7.54% of the office space.[12]
[12]Reasons, [147]–[150].
Further, the judge concluded that both BSL’s internal communications and correspondence to Sarina suggested that BSL did not believe it was deprived of the use of the office space because of the threat posed by a suspected structural defect. As a result, the premise for finding a breach of the quiet enjoyment covenant was not made out. The finding that BSL did not believe it was deprived of the use of the Premises because of the threat posed by a suspected structural defect is challenged in ground 3.
In light of these conclusions, the judge determined that Sarina’s claim should succeed. He then considered Sarina’s damages claim and as noted above, awarded Sarina the sum of $345,521.33.
Finally, the judge dealt with the counterclaim. The judge stated that, in light of his finding that Sarina did not breach the Lease, BSL’s counterclaim must fail.
Further, the judge stated that BSL had not demonstrated that it lost the use of any part of the Premises because the Terrace, which it had lost the use of, was not part of the Premises.[13] We pause to note that this conclusion cannot be correct in light of cl 4.1(c) of the Lease, which provides that the terms of the Lease applied to the Terrace as if it was part of the grant of the Lease.
[13]Reasons, [157]–[158].

Proposed Ground 1

Proposed ground 1 is as follows:
1 The primary judge erred in:
(a)construing the obligation in cl 14.4 of the lease between the applicant and the respondent to “maintain the building in a structurally sound condition” as not requiring the respondent, as at 3 March 2021, to carry out investigations to confirm that the building was in a structurally sound condition; and
(b)failing to conclude that the applicant validly terminated the lease on the basis of the respondent’s breach of that obligation.

BSL’s submissions

BSL submitted that Sarina’s obligation to ‘maintain the [B]uilding in a structurally sound condition’ in cl 14.4(a) (i.e. the maintenance covenant) required Sarina to carry out investigations to confirm that the Building was in a structurally sound condition in circumstances where it was on notice of a real risk that the Building may not be structurally sound.
While the judge did not make any express findings as to the content of the maintenance covenant, BSL submitted that it was implicit in [126]–[151] of the Reasons that he rejected this construction. We agree that the judge rejected this construction.
BSL contended that the judge did not consider how a reasonable businessperson would have understood the maintenance covenant. Rather, the judge had regard to hypothetical terms with no bearing on the maintenance covenant. BSL noted the judge’s references to how a duty to maintain might apply to different building structures, whether ‘an obligation to maintain simpliciter’ created an obligation to obtain expert reports, and how it was typical for leases to provide for a regime of mandatory engineering reports where the lessee wishes to carry out alterations.[14]
[14]Reasons, [138]–[141].
BSL relied upon the following matters in support of its construction of the maintenance covenant:
(a)it is a specific obligation which provides that Sarina ‘must’ maintain the Building in a structurally sound condition. That language reinforces the importance to both parties that the Building be structurally sound;
(b)to maintain something in a particular condition requires cognisance of the condition it is in. This logically requires inspections or investigations to be carried out. In this case, the NSIENT reports cast doubt on the structural soundness of the Building;
(c)the maintenance covenant involves some positive obligation other than the obligations provided under the repair covenant. Otherwise, the maintenance covenant would be surplusage. This is in circumstances where:
(i)the parties imposed two separate obligations, clearly intending to create obligations of different character;
(ii)it cannot be said that the maintenance covenant is only engaged in instances of actual structural damage as once the instances of structural damage become known, the maintenance covenant will have been breached and the repair covenant will be engaged. This is an absurd result;
(d)the maintenance covenant is not in the form of a mere warranty that the Building would be structurally sound. It is found within cl 14 which contains Sarina’s covenants, each of which conferred a positive obligation on Sarina; and
(e)it would run counter to business commonsense and be absurd if Sarina could avoid the maintenance covenant by being wilfully blind to the possibility of structural damage.
BSL submitted that, while each contract falls to be determined according to its own terms, its construction of the maintenance covenant finds broad support in other decisions in which duties to maintain have been considered. It referred to cases, not always in the context of a commercial lease, which have concluded that a duty to maintain is different from a duty to repair and involves a positive requirement to take steps in advance of a defect arising. We will turn to these cases further below.
As a result, BSL contended that it follows that Sarina breached the maintenance covenant by failing to conduct any investigations in light of the first two NSIENT reports to satisfy itself that the Building was structurally sound. BSL submitted that this failure was a breach of either:
(a)an essential term because the maintenance covenant was directed to the structural soundness of the Building which was critically important; or
(b)a sufficiently serious breach of an intermediate term because the NSIENT reports indicated that there may have been movement in the roof slab forming part of the ceiling of the Premises in which 49 BSL employees worked.

Sarina’s submissions

Sarina submitted that that the concept of maintenance in a commercial lease is not necessarily distinct from that of repair, relying upon Day v Harland in which Pearson J noted that ‘the dividing line between work of repair and work of that kind of maintenance which is not repair is not easy to draw, and there is an element of degree in the matter’.[15] Sarina also relied on the statement of Lord MacDermott in Galashiels Gas Co Ltd v O’Donnell that the obligation to maintain ‘describes a result to be achieved rather than the means of achieving it’.[16] On this basis, Sarina submitted that maintenance requires keeping something in a certain state and that it cannot be breached where, as here, the required state remained throughout the relevant period.
[15][1953] 1 WLR 906, 908.
[16][1949] AC 275, 287 (‘Galashiels’).

In this regard, Sarina relied upon the fact that BSL did not attempt to establish at trial that the Building was not structurally sound at any relevant time. The Flanders report shows, and the trial judge found, that there was no structural defect in the Building and that the concerns raised in the NSIENT reports regarding movement of the roof slab proved to be incorrect. For this reason, Sarina submitted that the judge implicitly found that the circumstances set out in the NSIENT reports said by BSL to oblige Sarina to carry out further investigations did not exist.
Sarina contended that the judge correctly construed the Lease by considering how the maintenance covenant might apply to the specific part of the Building about which the breach was alleged, including by finding that a structure like the roof slab cannot require the same level of programmed maintenance as other structural members of a building.[17]
[17]Reasons, [139].
Sarina submitted that, if BSL’s submission is correct and the maintenance covenant requires cognisance of the ‘condition’ of the relevant thing which is the subject of that obligation, it would follow that any lessor under such an obligation would be required to conduct regular inspections regardless of the particular circumstances of the case and that this should be rejected.
Sarina ultimately conceded that the maintenance covenant may entail something different to the repair covenant. However, Sarina questioned the purpose of an inspection in compliance with such an obligation: if a structural instability had been found, the duty to repair would have been enlivened. An investigation would simply provide evidence that the obligation to maintain had already been breached, rather than forming part of an obligation under it. As a result, Sarina contended that an investigation would have had no utility.

Consideration: proposed ground 1(a)

BSL did not rely upon any implied term to the effect that Sarina was obliged to investigate the matters raised in the first NSIENT report. Rather, BSL submitted that any such obligation is intrinsic to the maintenance covenant and falls within the words of cl 14.4(a). Thus, the question is whether the nature and extent of the maintenance covenant imposed such an obligation on Sarina in the circumstances of this case, according to the ordinary principles of contract interpretation. That is: what would a reasonable businessperson in the position of the parties have understood the maintenance covenant to mean in light of the objective circumstances surrounding the Lease and the commercial purpose and objects to be achieved by it?[18]
[18]Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty ltd (2017) 261 CLR 544, 551 [16] (Kiefel, Bell and Gordon JJ); [2017] HCA 12, citing Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 656–7 [35] (French CJ, Hayne, Crennan and Kiefel JJ); [2014] HCA 7.
As noted above, the maintenance covenant creates a duty to maintain the Building in a structurally sound condition; it is not limited to the Premises. This is unsurprising, given the Premises consist of the middle level of a three-level building owned by the lessor.
We turn now to consider the authorities referred to by the parties relevant to the maintenance covenant. Most judicial consideration of duties to maintain has arisen in the context of statutory obligations. However, we consider these authorities to be of assistance in understanding the scope of the maintenance covenant in the Lease. That is consistent with the approach adopted in Greetings Oxford Koala Hotel Pty Ltd v Oxford Square Investments Pty Ltd,[19] where Young J considered that the statements as to the nature of duties to maintain in cases concerning statutory obligations were applicable in the context of a commercial lease.[20]
[19](1989) 18 NSWLR 33 (Young J) (‘Oxford Koala’).
[20]Ibid 39.
The first case to which reference was made was Hamiltonv National Coal Board,[21] which involved a claim under s 81(1) of the Mines and Quarries Act 1954 (UK). That section placed a duty on mine owners to maintain mining equipment. Lord Keith of Avonholm held that the duty created a continuing obligation to keep the relevant equipment in a ‘proper and efficient state’ and was not satisfied merely by servicing the equipment.[22] The duty to maintain was construed to mean ‘to keep in a proper order by acts of maintenance before the thing to be maintained falls out of condition’.[23]
[21][1960] AC 633 (Viscount Simonds, Lords Radcliffe, Cohen, Keith of Avonholm and Jenkins) (‘Hamilton’).
[22]Ibid 646–51, Viscount Simonds at 641, Lords Cohen and Radcliffe agreeing at 642, Lord Jenkins agreeing at 657.
[23]Ibid 647.
Haydon v Kent County Council[24] related to a highway authority’s statutory duty to maintain highways pursuant to s 44(1) of the Highways Act 1959 (UK). The Act provided that ‘maintenance includes repair’. Goff LJ considered that ‘maintenance’ in its ordinary sense meant the ‘preservation of a physical thing or of its functions’.[25] Shaw LJ considered that ‘maintenance’ is wider in its scope than repair and that the ordinary meaning of ‘to maintain’ is ‘to keep something in existence in a state which enables it to serve the purpose for which it exists’.[26]
[24][1978] QB 343 (Denning MR, Goff and Shaw LLJ) (‘Haydon’).
[25]Ibid 361–2.
[26]Ibid 364.
Ridis v Strata Plan 10308 involved a claim brought under s 62 of the Strata Schemes Management Act 1996 (NSW),[27] which provided that ‘[a]n owners corporation must properly maintain and keep in a state of good and serviceable repair the common property …’. The question was whether the duty to maintain in s 62 required the replacement of old glass panes in doors that were in good repair and operating as intended, but were not safety glass, and thus did not accord with contemporary building standards. The majority, consisting of Hodgson and McColl JJA, concluded it did not. In doing so, however, Hodgson JA concluded that:
(a)the duty to maintain was absolute, requiring an owners corporation to have in place a system for monitoring the maintenance and state of repair of the common property; and
(b)while this did not mean that the duty to maintain required the hiring of experts to inspect every aspect of the common property, ‘if [the owners corporation] has reason to believe that any such aspect could be dangerous, such as electrical wiring, then it should engage the appropriate expert’.[28]
[27](2005) 63 NSWLR 449 (Hodgson, McColl and Tobias JJA) (‘Ridis’); [2005] NSWCA 246.
[28]Ibid [5]–[6].
McColl JA also adopted the comments of Lord Keith of Avonholm in Hamilton and Shaw LJ in Haydon set out above.[29] After an extensive analysis of the case law, her Honour said this:
In my view, prima facie, the question whether the owners corporation has discharged its s 62 duties of maintenance and repair is to be judged by whether an “ordinary person” in the owners corporation’s position “would or should have known that there was any risk; whether that person would or should have known of steps that could be taken in response to that risk; and the reasonableness of taking such steps”.[30]
[29]Ibid [161].
[30]Ibid [187], quoting from Jones v Bartlett (2000) 205 CLR 166, 220 [186] (Gummow and Hayne JJ); [2000] HCA 56.
Tobias JA dissented, taking a broader view of the duty to maintain: he concluded that s 62 required owners corporations to undertake inspections from time to time to determine whether repairs or replacements were necessary.[31]
[31]Ibid [55].
As already noted, each of these cases concerned a statutory duty to maintain. In Oxford Koala,[32] however, Young J applied the statements in Hamilton and Haydon concerning the nature of duties to maintain in the context of a commercial lease.[33] In that case, an agreement for the lease of hotel premises provided that the lessor would be responsible for maintenance of the lifts. Young J concluded ‘the word “maintain” carries with it the connotation that the landlord is obliged not only to attend to cases where there is a malfunction of the lift, but also to take such preventative measures as should ensure the lifts should not malfunction.’[34] McColl JA endorsed these comments in Ridis.[35]
[32](1989) 18 NSWLR 33 (Young J).
[33]Ibid 39.
[34]Ibid 40.
[35]Ridis (2005) 63 NSWLR 449, 484 [162]; [2005] NSWCA 246.
Seiwa v Owners Strata Plan 35042 also arose under s 62 of the Strata Schemes Management Act 1996 (NSW).[36] Brereton J formulated the duty to maintain in light of the above cases in the following terms:
the duty to maintain involves an obligation to keep the thing in proper order by acts of maintenance before it falls out of condition, in a state which enables it to serve the purpose for which it exists … not only to attend to cases where there is a malfunction, but also to take preventive measures to ensure that there not be a malfunction.[37]
[36][2006] NSWSC 1157 (Brereton J) (‘Seiwa’).
[37]Ibid [4], citing Hamilton [1960] AC 633 (Lord Keith of Avonholm); Haydon [1978] QB 343, 364 (Shaw LJ); Ridis (2005) 63 NSWLR 449 [161] (McColl JA); [2005] NSWCA 246.
In light of the authorities referred to above at [75] to [82], we do not accept the submissions of Sarina to the effect that the concept of maintenance: (1) is not necessarily distinct from that of repair; and (2) only requires keeping something in a certain state with the result that it cannot be breached where, as here, the required state remained throughout the relevant period. Rather, we consider that Brereton J’s expression in Seiwa represents the current law in Australia of the content of a duty to maintain, whether the duty be statutory or contractual.
In particular, these authorities demonstrate that a duty to maintain has a pre-emptive or preventive element and is not enlivened only once the thing required to be maintained falls into disrepair. In this way, a duty to maintain is to be distinguished from a duty to repair, which arises only upon the occurrence of a defect whereas a duty to maintain is continuous. We do not consider that this is inconsistent with the decision of Lord MacDermott in Galashiels. While a duty to maintain may not prescribe the particular means of maintaining something, it does not follow that there is no obligation to carry out any maintenance until the relevant thing falls into disrepair.
In this case, it is significant that the parties included the maintenance covenant and the repair covenant in distinct subclauses. The fact that there are two separate obligations discloses an objective intention that those obligations are not the same. In our view, it is relevant that, generally speaking, a lessor’s duty to repair is only enlivened upon being put on notice of a defect.[38] This further distinguishes it from a duty to maintain, which may be pre‑emptive in nature.
[38]Croft, Hay and Virgona, Commercial Tenancy Law (2018, 4^th ed, LexisNexis Butterworths) 283 [10.6] and authorities cited therein.
In our view, the judge was correct to note that a duty to maintain a complex structure like an office building might operate differently relative to different parts of that structure. Consistent with the authorities referred to above, some parts of the Building, such as an elevator, may require regular maintenance, while others, such as a concrete slab, would not normally be expected to require a ‘programme’ of maintenance. Structural issues, in particular, may be difficult to detect and it may not always be clear whether there is a need for repair works. As a result, the content of any duty to maintain will vary in each context, as will the form of maintenance required.
In this case:
(a)BSL had a reasonable concern that there was, or was a risk of, a structural defect at the Building on the basis of the issues with the building and the NSIENT reports; and
(b)Sarina was put on notice of these concerns.
We consider that the judge erred in finding that there was no basis in the maintenance covenant for finding an obligation to obtain expert reports. His Honour failed to adequately consider the significance of the two matters described at [87] above.
First, the relevant question is not whether a duty to maintain carries with it a general obligation to obtain expert reports (as suggested by the judge at [139] of the Reasons), but whether in the circumstances of this case, Sarina was required to undertake investigations in response to being put on notice of a possible structural defect. The judge then rejected the proposition that the maintenance covenant ‘in the present situation extends to an obligation to obtain a structural engineer’s report and/or to provide that report to [BSL]’.[39] With respect, we disagree.
[39]Reasons, [139].
In our view, Sarina was required to undertake investigations in response to being put on notice of a possible structural defect. This is where, as set out above:
(a)the scope of a duty to maintain a building in a structurally sound condition will vary depending on the circumstances (in particular, the nature of the thing which the subject of the duty); and
(b)that obligation includes taking preventive or proactive measures to prevent a structural problem occurring.
Indeed, in our view, once it is accepted that the maintenance obligation includes preventive measures, and that these measures vary in the circumstances of each case, these preventive measures may include investigating reasonably suspected defects. This may require obtaining expert reports in appropriate circumstances to determine whether remedial works are required. This does not require reading additional words into the maintenance covenant; rather, this obligation is inherent to a duty to maintain.
Counsel for BSL submitted that the maintenance covenant would require investigation ‘if a landlord is reasonably on notice of a problem and a reasonable person in the position of the landlord seeking to maintain the building would investigate it’. Counsel submitted that it is not necessary in this case to chart the outer bounds of the duty because the NSIENT reports clearly raised reasonable concerns as to a possible structural issue and recommended further investigations be undertaken. We agree. It is sufficient to enliven the maintenance covenant if the landlord is on notice of a reasonably‑based concern as to the structural soundness of the building.
In our view, a reasonable businessperson would expect that the maintenance covenant would oblige Sarina to conduct further investigations in response to BSL’s reasonable concern that there was, or was a risk of, a structural defect in the Building. BSL was not raising a baseless or uninformed concern. Rather, in response to the Terrace Damage, BSL engaged an engineer at its own expense to review that damage. NSIENT advised in the first NSIENT report (which was provided to Sarina on 18 March 2020) that there appeared to be movement in the roof slab which required further investigation by a structural engineer. In our view, this provided good and proper reason for concerns regarding the structural soundness of the Building.
Further, these concerns and recommendations were repeated by the second NSIENT report which was commissioned by Sarina itself. It would appear that this aspect of the second NSIENT report was ignored — or at the very least no appropriate response was undertaken — in light of the nature and extent of the communications to that time. As discussed above,[40] BSL made numerous requests for Sarina to carry out the investigations recommended by the NSIENT reports between 18 March and 16 December 2020. Yet Sarina did not do so.
[40]See above at [18]–[40].
We note further that it would appear to have been beyond the ability of BSL to undertake many of the kinds of investigation suggested in the first NSIENT report, because those investigations could not be undertaken in or on the Premises leased by it, but required access to other parts of the Building, over which it had no rights of entry. They were matters only Sarina could investigate. This seems evident from the fact that Sarina sought to rely upon the need for owners corporation approval to undertake the recommended investigations.
To comply with the maintenance covenant in these circumstances, we consider that Sarina was obliged, within a reasonable time after receipt of the first NSIENT report, to investigate those reasonable concerns.[41] Such investigation was needed to attempt to determine if the roof slab was in sound structural condition and whether any further pre‑emptive measures needed to be taken to ensure it remained in a structurally sound condition.
[41]Alternatively, it was obliged to investigate those reasonable concerns after receipt of the second NSIENT report, which it had commissioned.
Sarina did not do so. Indeed, in response to being put on notice of possible structural defects, Sarina failed to undertake any further investigations until the Lease was terminated. And it only obtained a report from a structural engineer after the litigation was underway.

Consideration: proposed ground 1(b)

In our view, Sarina’s breach of the maintenance covenant constituted repudiation. We note that the principles of repudiation were not in dispute. A repudiatory breach entitles a party to terminate where the other party breaches an essential term of the contract in any way or breaches a non‑essential or intermediate term in a sufficiently serious way.[42] Whether a term is essential depends on the intention of the parties expressed by the language of the contract in the context of its commercial purpose.[43]
[42]Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115, 135–8 [44]–[49] (Gleeson CJ, Gummow, Heydon and Crennan JJ) (‘Koompahtoo’); [2007] HCA 61.
[43]Ibid [48].
In this case it is unnecessary to decide whether the maintenance covenant was an essential term of the Lease. This is because we have formed the clear view that, at the very least, Sarina’s conduct constituted a sufficiently serious breach of a non‑essential or intermediate term so as to amount to a repudiatory breach.
In Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd, Gleeson CJ, Gummow, Heydon and Crennan JJ said such breaches have been described as ‘going to the root of the contact … such as to deprive the injured party of a substantial part of the benefit to which he is entitled under the contract’. The analysis involves consideration of the nature of the contract, the nature of the term, the kind and degree of the breach and consequences of the breach for the other party.[44]
[44]Ibid [54]–[55] citing Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361, 380 (Buckley LJ).
We have concluded Sarina’s breach of the maintenance covenant was sufficiently serious to justify termination. First, the maintenance covenant was of high importance. It related to the structural soundness, and therefore safety, of the Premises for which the only permitted use was as a commercial office.
Second, we consider that Sarina’s breach was significant and subsisted for a substantial duration. In our view, the breach commenced after Sarina had a reasonable opportunity to consider and respond to the first NSIENT report provided on 18 March 2020.[45] The breach continued until 3 March 2021, when BSL terminated the Lease. We note that throughout this period BSL continued to raise Sarina’s failure to address the issues described in the NSIENT reports.
[45]Alternatively, it commenced after Sarina had a reasonable opportunity to consider and respond to the second NSIENT report, provided on 26 November 2020.
The consequence of this breach was also significant, in light of all of Sarina’s conduct. By March 2021, BSL could not have had any comfort that Sarina’s breach in failing to investigate the structural soundness of the Building would be remedied in the foreseeable future. It is relevant that BSL was under the OH&S obligation, which Sarina was made aware of, at least in general terms, from July 2020. In all these circumstances, we have formed the view that BSL was entitled to accept Sarina’s repudiation and terminate the Lease on 3 March 2021. In our view, BSL became entitled to terminate for repudiation upon receipt of Sarina’s email of 18 December 2020 at the latest.

For completeness, for much the same reasons, we consider that Sarina’s conduct from March 2020 through to early 2021 also evinced an unwillingness to perform its obligations under the maintenance covenant so as to constitute a renunciation of the Lease.[46]
[46]See Koompahtoo (2007) 233 CLR 115, 135–6 [44] (Gleeson CJ, Gummow, Heydon and Crennan JJ); [2007] HCA 61.
In oral argument, counsel for Sarina contended that the payment of rent between December 2020 and March 2021 was in some way an obstacle to BSL’s right to terminate for breach of the maintenance covenant. The judge referred to this at [115] of the Reasons, stating that between December 2020 and March 2021, BSL ‘elected to treat the [L]ease as enforceable by paying rent’.[47] Before this Court, Sarina did not rely upon the payment of rent as an election to affirm the Lease but referred to this fact as an ‘evidentiary consideration’. However, counsel did not make clear the basis upon which this ‘evidentiary consideration’ was relevant. In our view, the fact that rent was paid is not relevant to whether BSL was entitled to terminate the Lease for Sarina’s failure to investigate the structural issues raised in the NSIENT reports. This was in a context where BSL was requesting those investigations be undertaken and BSL may have been paying rent to protect its own interests pending those investigations being undertaken (for example, to avoid any termination of the Lease by failing to pay rent).
[47]Reasons, [115].
For these reasons, we would grant leave to appeal and allow the appeal in respect of proposed ground 1.
As a consequence, BSL is not liable to Sarina for breach of contract and is itself entitled to damages. As noted above, at the hearing of this appeal BSL limited its claim for damages to $85,000. As noted above, this consists of an early termination fee paid by BSL to its internet service provider and Sarina’s drawdown of BSL’s bank guarantee. Sarina conceded that this was a proper assessment of damages in the event BSL was successful in the appeal.

Proposed Ground 2

Proposed ground 2 is as follows:
2 The primary judge erred in:
(a)concluding that, as at 3 March 2021, the respondent had not manifested an unwillingness to perform the obligations in cl 14.4 of the lease between it and the applicant to “maintain the building in a structurally sound condition” and be “responsible for all … structural repairs to the building”; and
(b)failing to conclude that the applicant validly terminated the lease on the basis of the respondent’s repudiation.
Proposed ground 2 was premised on BSL failing on proposed ground 1. Because we have allowed the appeal in respect of ground 1 and found that BSL was entitled to terminate the Lease, it is not necessary to consider proposed ground 2.

Proposed Ground 3

Proposed ground 3 is:
3 The primary judge erred in:
(a)concluding that, as at 3 March 2021, the respondent was not in breach of the obligation in cl 14.1 not to “interrupt the [applicant’s] quiet enjoyment of the premises during the term”; and
(b)failing to conclude that the applicant validly terminated the lease on the basis of the respondent’s breach of that obligation.
In oral argument, BSL abandoned proposed ground 3(b). As a result, it is only necessary to consider proposed ground 3(a). Further, BSL only relies on an alleged breach of the quiet enjoyment covenant insofar as it would entitle it to restitutionary relief.

The parties’ submissions

In summary, BSL submitted that Sarina’s failure to undertake the investigations required by the maintenance covenant also constituted a breach of the quiet enjoyment covenant by substantially interfering with the ordinary and lawful enjoyment of the Premises by BSL. BSL submitted that this breach gave rise to a total failure of consideration between December 2020 and March 2021 on the basis that BSL’s staff would have returned to the Premises during that time if there had been no breach. As a result, BSL claimed the amount of rent paid to Sarina between December 2020 and March 2021 by way of restitution, totalling $60,106. At trial, BSL did not seek to recover the amount of rental payments it had made on the basis of contractual damages. Nor did it do so on the appeal. It is therefore not necessary to consider whether BSL could recover amounts paid in rent on the principles of contractual damages.
BSL contended that breach of a quiet enjoyment covenant can occur by reason of a landlord’s omission or failure to comply with a positive obligation.[48] BSL argued that if it was successful in proposed ground 1(a) (as it has been), it would follow that there was a breach of the quiet enjoyment covenant.
[48]Citing Todburn Pty Ltd v Taormina International Pty Ltd (1990) 5 BPR 11,173, 11,177 (Powell J); Stonecrest Marble Ltd v Shepherds Bush Housing Association Ltd [2021] EWHC 2621, [18]–[21] (Williams J).
BSL submitted that the judge erred in two respects in finding there was no breach of the quiet enjoyment covenant:
(a)first, by considering that the Flanders report showed the Premises were in fact structurally sound when this was not known by the parties at the relevant time; and
(b)second, by finding that BSL did not believe that it was deprived of the whole of the Premises.
In relation to the second point, BSL submitted that its subjective belief was not relevant and that the test was ‘objective’. The import of this submission was that the trial judge had erred in relying on BSL’s subjective belief. BSL also submitted that the judge was wrong as a matter of fact, because it did have the requisite belief.
Before this Court, BSL did not make any submissions as to why the alleged breach of the quiet enjoyment covenant would constitute a total failure of consideration other than by referring back to its closing submissions at trial. Those submissions stated that a failure of consideration refers to the actual benefit that the claimant bargained for and the ‘state of affairs contemplated as the basis for the payment’, citing David Securities Pty Ltd v Commonwealth Bank of Australia[49] and Roxborough v Rothmans of Pall Mall Ltd.[50] BSL submitted that the relevant state of affairs or ‘actual benefit’ was the ability to occupy and use the Premises. It submitted that the total failure of consideration doctrine could apply to a total failure of consideration for severable periods, relying upon the judgment of Gummow J in Roxborough.[51]
[49](1992) 175 CLR 353, 382 (Mason CJ, Deane, Toohey, Gaudron and McHugh JJ); [1992] HCA 48.
[50](2001) 208 CLR 516, 525–6 [16] (Gleeson CJ, Gaudron and Hayne JJ), (‘Roxborough’); [2001] HCA 68.
[51]Ibid 558 [107].
As to proposed ground 3(a), Sarina submitted:
(a)the judge was correct to have regard to the Flanders report, as it was the only evidence before the court as to the structural soundness of the Building; and
(b)the judge was correct to find that BSL did not believe that it was deprived of the use of the whole of the Premises.
Sarina did not make any submissions as to whether the alleged breach of the quiet enjoyment covenant would give rise to a right to restitution of rental payments on the basis that there was a total failure of consideration.
Consideration
We do not consider it necessary to determine whether Sarina breached the quiet enjoyment covenant in this case. This is because we are not satisfied that, even if there were such a breach, BSL would be entitled to a restitutionary remedy. In summary, this is because BSL did not make plain how the principles applicable in determining whether to grant restitutionary relief would result in an award of restitution in this case. As noted above, before this Court, BSL merely relied upon its written closing submissions at trial and did not otherwise address this Court in relation to its entitlement to restitutionary relief. Most relevantly, BSL did not explain why a breach of the quiet enjoyment covenant would give rise to a total failure of consideration, nor how its claim was consistent with the terms of the Lease.
A right to restitutionary relief arises where one party is enriched at the expense of another by reason of an unjust, qualifying or vitiating factor, provided there is no applicable defence, such as a change of position.[52] One such unjust, qualifying or vitiating factor is a total failure of consideration, or a total failure of a severable part of the consideration.[53] In Mann v Paterson Constructions Pty Ltd, Nettle, Gordon and Edelman JJ explained that:
In this context, consideration means the matter considered in forming the decision to do the act: “the state of affairs contemplated as the basis or reason for the payment”. In many cases the relevant basis will be the benefit that is bargained for. In those cases, “[t]he test is whether or not the party claiming total failure of consideration has in fact received any part of the benefit bargained for under the contract or purported contract”.[54]
[52]Ibid 527 [20] (Gleeson CJ, Gaudron and Hayne JJ); Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498, 517 [30] (French CJ, Crennan and Kiefel JJ); [2012] HCA 7.
[53]Mann v Paterson Constructions Pty Ltd (2019) 267 CLR 560, 627 [168] (Nettle, Gordon and Edelman JJ) (‘Mann v Paterson’). This has also been described as a ‘failure of basis’: see, eg, [77]–[78] (Gageler J); [2019] HCA 32.
[54]Ibid [168] (citations omitted).
To obtain the restitutionary relief it seeks, BSL must establish that the entirety of the consideration it paid rent for was the ability to ‘occupy and use the Premises’ as a commercial office and that there was a total failure of this consideration during the relevant period, which it must establish is a severable part of the whole consideration. This Court was not addressed on how the alleged breach of the quiet enjoyment covenant constituted a total failure of consideration in circumstances where the Lease remained on foot for the period over which restitution is claimed. While the Court was not taken to any relevant authorities, we note there are cases which appear to be inconsistent with BSL’s contentions.[55] These cases suggest that the consideration for the obligation to pay rent under a lease is the demise of the leased premises, which grants the tenant a proprietary interest in the property, rather than the ability to use the premises for a particular purpose. If that is right, then the inability to use the Premises for the purposes of BSL’s business (which is said to constitute the breach of the quiet enjoyment covenant) would not amount to a total failure of consideration, because for the period in question the Lease remained on foot and BSL continued to obtain the demise of the Premises.
[55]See Re Fearndale Holdings Pty Ltd [2019] NSWSC 645, [40] (Black J); Bank of New York Mellon v Cine-UK Limited [2022] EWCA 1021, [144]–[159] (Flaux C, Snowden and Patten LJJ agreeing) (‘BNY Mellon’).
Further, the terms of any relevant agreement are highly material to a restitutionary claim. As Kiefel CJ, Bell and Keane JJ observed in Mann v Patterson, ‘[r]estitutionary claims must respect contractual regimes and the allocations of risk made under those regimes’ and ‘it is essential to consider how the claim fits with contracts the parties have made’.[56] Yet the relevance of the contractual regime in considering a claim for restitution was not raised by BSL before this Court, or at trial. Still less were any particular terms of the Lease addressed. However, it appears to us that there are terms of the Lease which are relevant, but were not addressed: in particular, cl 12.1, headed ‘No warranty of suitability’, and cl 16, headed ‘Abatement and Restoration’. The former provided that the parties agreed that the Lease was not conditional upon the Premises being suitable for conduct of the permitted use (i.e. as a commercial office). The latter provided that if the Premises were damaged, resulting in the whole or part of them being physically unfit for use, the lessee’s covenant to pay rent is suspended to a reasonable degree.[57]
[56]Mann v Paterson (2019) 267 CLR 560, [14]–[18]. See also BNY Mellon [2022] EWCA 1021, [152]–[158].
[57]BSL had initially pleaded a claim for damages based on cl 16.1, but it abandoned that claim at trial and relied instead on the claim in restitution.
As we noted above, none of these matters were addressed by BSL before us or before the trial judge. In light of BSL’s failure to address these significant aspects of its alleged entitlement to restitutionary relief, we would refuse leave to appeal in respect of proposed ground 3(a).
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[2024] VSCA 46

26 March 2024