Carrathool Hotel Pty Ltd v Scutti

[2005] NSWSC 401

Reported Decision: (2006) NSW ConvR 56-132

New South Wales

Supreme Court

CITATION:	Carrathool Hotel P/L v Scutti & 1 Or [2005] NSWSC 401
HEARING DATE(S):	21-24/03/05
JUDGMENT DATE :	29 April 2005
JUDGMENT OF:	White J
DECISION:	See paras 67 and 68 of judgment.

CATCHWORDS:	CONTRACT - Rectification of a lease - Common intention - Mutual mistake - No express covenant by the lessor to effect repairs - Lessee not required by contract to undertake structural works - No implied term that landlord be responsible for repairs - Held that parties intended and agreed that the lessor would be responsible for structural repairs - Construction of rent escalation clause by CPI increases where parties failed to agree on a new rent - Held that "failing agreement" included situation where no offer was made by either party.
LEGISLATION CITED:	Fair Trading Act 1987 (NSW)
CASES CITED:	Duke of Westminster v Guild [1985] 1 QB 688 Barrett v Lounova (1982) Ltd [1989] 1 All ER 351 Carbure Pty Ltd v Brile Pty Ltd [2002] ANZ Conv R 584, [2002] VSC 272 Dowding and Reynolds, The Law of Dilapidations, 3 ed Adami v Lincoln Grange Management Ltd [1998] 1 EGLR 58 Woodfall, Landlord and Tenant, Vol 1 Standard Portland Cement Co Pty Ltd v Good [1982] 2 NSWLR 668 Sipad Holding ddpo v Popovic (1995) 61 FCR 205 Bush v National Australia Bank Ltd (1992) 35 NSWLR 390 Commonwealth Bank of Australia v Cluness (1997) 8 BPR 15,467 Muriti v Prendergast [2005] NSWSC 281 Granada Theatres Ltd v Freehold Investment (Leytonstone) Ltd [1959] 1 Ch 592 Dowding and Reynolds, Dilapidations, The Modern Law and Practice, 3 ed British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1980] QB 137 Lee-Parker v Izzet [1971] 1 WLR 1688 Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 1 WLR 501 Batiste v Lenin (2002) 10 BPR 19,441 Batiste v Lenin (2003) 11 BPR 20,403 Citibank Pty Ltd v Simon Fredericks Pty Ltd [1993] 2 VR 168 Debonair Nominees Pty Ltd v J & K Berry Nominees Pty Ltd (2000) 77 SASR 261 Waite, Disrepair and Set-Off of Damages Against Rent: The Implications of British Anzani [1983] Conv 373 Waite, Repairs and Deduction from Rent, The Conveyancer and Property Lawyer [1981] 45 Conv (N.S.) 199 Connaught Ltd v Indoor Leisure Ltd [1994] 1 WLR 501 Re Partnership Pacific Securities Ltd [1994] 1 Qd R 410 Grant v NZMC Ltd [1989] 1 NZLR 8 Derham, The Law Relating to Set-Off, 3 ed
PARTIES:	Carrathool Hotel Pty Ltd v Gino Scutti & 1 Or
FILE NUMBER(S):	SC 4773/04
COUNSEL:	Plaintiffs: R Parsons Defendants: G Carolan
SOLICITORS:	Plaintiff: Deutsch Partners Lawyers Defendant: Back Schwartz Vaughan

LOWER COURT JURISDICTION:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
EXPEDITION LIST

WHITE J

Friday, 29 April 2005

4773/04 CARRATHOOL HOTEL PTY LTD v GINO SCUTTI & 1 Or

JUDGMENT

1 HIS HONOUR: The plaintiff is the lessee of the Carrathool Hotel. The defendants are the owners of the hotel. Carrathool is a small country town in south-western New South Wales.

2 The principal issues in these proceedings are: (a) what obligations the defendants have to effect structural repairs to the hotel; (b) whether they are in breach of those obligations and if so, in what respects; (c) what structural repairs need to be done; (d) the quantum of damages; (e) whether the plaintiff is entitled to recover the value of work done by it to effect repairs; (f) the calculation of rent; and (g) whether the plaintiff can set off its claim for damages or its claim for recoupment against its liability for rent. Only the first and sixth of these issues are dealt with in these reasons.

3 The hotel building is over 100 years old. The defendants purchased it in 1996. In 1999, the plaintiffs purchased the business of the then lessee and took an assignment of the lease. At the same time, they entered into an agreement with the defendants to vary the terms of the lease. The principal variations were that the term of the lease was extended until 2009, the lessee was given an option to renew the lease for a further 10 years on payment of a premium, and clause 12 of the lease was amended. Clause 12 concerns the plaintiff’s obligations to effect repairs.

4 The original lease was given by the then registered proprietors to a Mr and Mrs Powell for a term of fifteen years commencing on 5 December 1989 and terminating on 4 December 2004. Clause 12(e) of the lease contained a covenant by the lessees in the following terms:

“to well and sufficiently repair, maintain, pave, empty, cleanse and keep the Hotel (except the roofs and the exterior of all buildings and structures erected on the land), furniture, furnishings, stock-in-trade, goods, chattels, effects and things whatsoever in good and substantial repair and condition in all respects when, where and so often as need shall be.”

5 The word “Hotel” was not defined. There was no express covenant by the lessor to effect repairs, notwithstanding that the lessee’s covenant to effect repairs did not apply to the roofs or exterior of structures on the land.

6 The Variation of Lease was entered into between the plaintiff and the defendants sometime between 25 August and 6 September 1999. Clause 6 of the Variation of Lease provided:

“Subject to clause 10 hereof the parties hereto acknowledge and agree that nothing contained in clause 12 of the Lease shall have the effect of requiring the Lessee to undertake structural works in respect of the demised premises unless such structural works are required to be undertaken as a result of the Lessee’s use of the demised premises.”

7 There was no clause 10 in the Variation of Lease. Clause 10 of the lease did not relate to the subject matter of clause 12 of the lease, or clause 6 of the variation.

8 The Variation of Lease contained no express covenant by the lessors to undertake structural works. It widened the exception to the lessee’s obligation to effect repairs so that the lessee was not required to undertake structural works, unless they were required to be undertaken as a result of its use of the premises.

9 When the plaintiff took the transfer of the lease and entered into the Deed of Variation with the defendants, the hotel was in poor structural condition. In these proceedings, the plaintiff contends that the defendants were obliged within a reasonable time to effect structural repairs and structural maintenance to bring the demised premises into a good and sound condition, and to keep it in such condition. They contend that the defendants’ obligation to do this should be implied, or that the Deed of Variation should be rectified to accord with what was said to be the common intention of the parties to that effect. They also maintained a claim for breach by the defendants of s 42 of the Fair Trading Act, 1987 in respect of representations made prior to the plaintiffs taking the transfer of lease.

10 By their defence the defendants denied that the plaintiff was entitled to any of the relief sought.

11 At a directions hearing on 21 February 2005, the parties agreed that not all the issues could be determined at the hearing as there was a good deal of detailed evidence about alleged defects in the building and the work which would be required to rectify them which would take longer to determine, even if they were appropriate for determination by a judge. On that day I directed that the hearing on 21-24 March 2005 be limited to issues of liability including issues as to whether any damage had been suffered, but not the quantification of damage.

12 At the commencement of the hearing a further issue arose about the extent to which it was appropriate at that stage of the hearing to go into the details of the alleged defects to the building and the extent of the repair which the plaintiff claims is needed. The plaintiff read two affidavits of Mr Kendall, a consulting engineer. He reported on his inspection of the hotel in November 2002 and on 11 November 2004. His reports set out numerous instances of what are said to be defects in the building. He makes recommendations as to what structural work and other work is required in order to remedy those defects. His report of his inspection of 11 November 2004 identifies over 150 alleged defects in more than 35 areas of the hotel. The defendants tendered a report which they obtained on or about 23 June 2004 from another consulting engineer, Mr Kennard. He reported on his inspection of the hotel as at 31 May 2004. His report identified numerous defects, although not as many as were referred to by Mr Kendall. The defendants sought to read an affidavit of Mr Kennard sworn on 16 March 2005 which I was told had been served on 8 March 2005. The plaintiff objected to its being read. In general terms, Mr Kennard says that substantially less repair work is needed to the hotel than Mr Kendall contends is required.

13 It was evident from discussion with counsel when this affidavit was sought to be read, that there would be difficulty in determining at that stage of the hearing precisely in what respects the defendants had breached what the plaintiff contended were their obligations. I deferred ruling on the question of whether the affidavit of Mr Kennard could be read and directed that there be no cross-examination of Mr Kendall until the issues of rectification, implication of a term, or contravention of s 42 of the Fair Trading Act, had been determined, or until further order. The evidence of the engineers is not relevant to determining whether the defendants had any obligation to effect structural repairs, and if so, what was the content of that obligation.

14 It emerged during the course of the hearing that notwithstanding the terms of the defence, the defendants accepted some responsibility to effect structural repairs. In a written submission delivered on the morning of the hearing the defendants’ counsel said:

“ Nor does there appear to be any basis for implication of a term. The lease is effective, particularly in light of the fact that the Variation of Lease executed by the parties specifically provides for the defendants as lessors to undertake structural works (clause 6).
The plaintiff took an assignment of the lease of the premises knowing their condition and the defendant is not obliged to do more than keep the premises in the condition in which they were demised ( Permbery v Lamdin [1940] 2 All ER 434). ” (Emphasis added).

15 One difficulty with this submission is that the Variation of Lease does not specifically provide that the defendants as lessors should undertake structural work. The defendants initially denied that there was an implied term that they should do so, and they denied that the lease as varied should be rectified to include any covenant by the lessors that they should carry out structural works.

16 During the course of final submissions, in response to requests from the Bench that the defendants articulate their position precisely, counsel for the defendants said that the defendants accepted that subject to notice being given, they were obliged within a reasonable time and in a proper and workmanlike manner to effect structural repairs to bring the roof, internal and external walls, floors and septic tank to a structurally satisfactory condition, and to effect structural maintenance to keep them in such condition.

17 The defendants said that they had never denied liability to effect structural repairs. However, they had been pressed by the solicitors for the plaintiff as early as 12 March 2004, to acknowledge that they were responsible for and obliged to effect repairs of a structural nature. They did not do so. Nor, in their defence, did they admit that they had such obligations. Rather they took the position that it was up to the plaintiff to make good the case which it asserted.

18 It will be observed that ultimately the defendants did not maintain their initial submission that they were not obliged to do more than keep the premises in the condition in which they were demised. The reason for that is that the evidence clearly established that at a meeting between the defendants and the directors of the plaintiff in July 1999, the defendants undertook to make structural repairs to improve the building, not just to maintain it in its then condition.

19 Ultimately the difference between the parties as to the extent of the defendants’ obligations were:

(a) whether the obligation to effect structural repairs applied to the whole of the demised premises, or only to the roof, walls and floors of the hotel and to the septic tank; and

(b) whether the structural repairs which the defendants are required to carry out are those needed to bring the building to a “good and sound” condition, or to a “satisfactory” condition.

20 There are also differences between the parties as to what was a reasonable time in which to effect structural repairs, and as to what repairs are structural. However those questions can be put to one side for the moment.

Pre-contractual Discussions

21 The current directors of the plaintiff are Mr and Mrs McGinn. At the time the plaintiff took a transfer of the lease, a Mr Winterton was another director of the plaintiff. He did not give evidence. Mr McGinn had formerly worked at the hotel when it was leased to the previous lessees, Mr and Mrs Powell. Both Mr and Mrs McGinn and the defendants were aware that the hotel was in need of repair. For example, in 1999, it was evident that the floors were not level, there was cracking on the internal and external walls, plaster was falling off the internal walls and ceilings, there was a problem with the septic tank leaking into the next door property, and the building was badly affected by damp which was contributed to by a leaking roof and gutters.

22 On 25 July 1999, Mr and Mrs McGinn and Mr Winterton met with the defendants at the latters’ home in Wagga Wagga. Mrs McGinn gave a detailed statement of what she claimed was said at the meeting. Given that the meeting occurred more than five years before she swore her affidavit, I approach her professed recollection of all that was said with considerable caution. However, to a substantial extent her evidence was corroborated by evidence given by Mrs Scutti during her cross-examination. Both Mrs Scutti and Mrs McGinn appeared to me to be intelligent and honest witnesses who were endeavouring to tell the truth. They both readily made concessions against their interest and both appeared to have a reasonably accurate and detailed recollection of events. Whilst there are differences in their recollections, by and large the differences are not significant and I did not feel called upon, at least at this stage of the hearing, to choose between the testimony of one or the other. I am satisfied that the evidence of both of them as to the meeting held on 25 July 1999 is more accurate and reliable than either of their husbands, neither of whom appeared to best advantage in the witness box.

23 Mrs Scutti acknowledged that it was her intention at the time of the meeting of 25 July 1999, that the defendants would attend to the necessary structural repairs to bring the building from a poor condition to a good condition. At the meeting Mr McGinn said that the whole building needed restoration. He said that the top priority was the roof, then the internal walls, external walls, broken windows, drainage and guttering problems, rising damp, floor repairs and levelling, replastering, the fixing of verandahs and walkways, fencing and removal of sand would need to be attended to. Some of this work was not structural repair. Mr Scutti acknowledged that he agreed that the roof, the internal and external walls and the floors were in need of structural repair, as well as the septic tank. Mrs Scutti agreed that in July 1999 pretty much the whole of the building needed some structural work or maintenance.

24 It was common ground that Mr McGinn and Mr Scutti agreed that, apart from the septic tank, the roof should be done first. Mrs Scutti agreed that at the meeting the parties spoke about drainage, guttering problems and rising damp, as well as floor repairs, levelling and replastering. She also said that Mr McGinn spoke about fixing verandahs and walkways as required, although she did not recall there being discussion about fencing or the removal of sand from the cellar.

25 I think it is clear both from the evidence which Mrs McGinn and Mrs Scutti gave of the meeting of 25 July 1999, and from the way the defendants have conducted themselves after the meeting, that the discussions about what structural work was needed to be done, were not confined to work to the roof, the walls and the floor of the building, but ranged more widely. Mrs Scutti gave the following evidence:

“Q. In relation to the things that Mr McGinn had listed starting with the roof, drainage, replastering, levelling etc., Mrs McGinn then said: ‘these things are your responsibility and you have to pay for it.’
A. That’s correct, yes.
Q. She said: we are not taking on that responsibility?
A. That’s correct.
Q. In that meeting she was obviously trying to get things reasonably clear. It was obvious to you she was trying to get things reasonably clear that there was no argument that structural repairs and maintenance was the landlord’s problem?
A. We never had any problem because we always felt it was our responsibility. There was no argument about that at all.
Q. When she said that, your husband said to her: ‘Yes, that’s right?’
A. Yeah.”

26 After the meeting, Mrs McGinn sent a facsimile to her solicitor, Mr Paul of Messrs Creaghe Lyle. In her facsimile she said:

“ In regard to the lease variation – all structural problems are the responsibility of the landlord, - structural meaning and to include all internal walls, flooring and septic.

…

Also enclosed is an agreement Scutti and ourselves came to in regards to repairs and maintenance. ”

27 Attached to her facsimile was a note which she prepared during the course of the meeting. It said in part:

“ Lease variations
Lessors to be responsible for internal, external walls and floors in regard to structural condition.
…
The lessee and lessor agree to work towards structural repairs and replacement as agreed by two parties.
Channels of communication to be kept open re phone etc. between lessors and lessees.
No? #** fighting. ”

28 On 28 July 1999 Mr Paul wrote to Messrs Farrell Lusher, the solicitors for the defendants. He said that a term of the variation of lease was to be that the landlord confirm that all structural work inside and out, including the internal and external walls, all flooring and septic was the responsibility of the lessor.

29 Later that day, after having had a conference with Mrs McGinn, Mr Paul wrote again to Farrell Lusher. He stated:

“ Clause 12 of the lease to be varied to provide that the lessor shall be responsible for all maintenance of all structural parts of the property, to include but not be exclusive of all internal and external walls or flooring, roof guttering, stormwater and the septic system. ”

30 It was submitted for the defendants that the best guide to the outcome of the meeting of 25 July 1999 are the documents produced contemporaneously, namely the facsimile from Mrs McGinn to Mr Paul enclosing her notes made at the meeting, and the correspondence from Mr Paul to Farrell Lusher on 28 July 1999. I agree with that submission. However, in my opinion the documents support the plaintiff’s position that the lessors were to be responsible for all structural repairs to the demised premises, not only to the roof, walls and floor. Whilst one part of Mrs McGinn’s note taken at the meeting refers only to internal and external walls and to floors, a later part of the note refers to the parties agreeing to working towards structural repairs and replacement as agreed by the two parties. Her facsimile to Mr Paul indicates that all structural problems were to be the responsibility of the landlord. Mr Paul’s correspondence to Messrs Farrell Lusher stipulated that the lessor should be responsible for the maintenance of all structural parts of the property.

31 Messrs Farrell Lusher did not specifically respond to this part of Mr Paul’s correspondence. They did not take issue with his correspondence. On 10 August 1999, they forwarded a draft of the Variation of Lease, which included clause 6 in the form in which it was when the document was later executed. There was no suggestion by Messrs Farrell Lusher that in drawing clause 6 they were not intending to give effect to the plaintiff’s stipulation that the lessors should be responsible for all maintenance of all structural parts of the property. Mr Paul gave evidence. He could not remember how he dealt with the draft which he received. If acting according to his usual practice, he would have checked the contents of the Deed of Variation. He expressed the opinion, reading the document again in 2005, that as clause 6 of the Deed of Variation effectively said that the lessee did not have to do any structural work, that would mean that if there was any structural work to be done, it would have to be done by the lessor. However he could not recall whether he turned his mind to that question at the time of receiving the document. One of the curious things about clause 6 is its reference to a non-existent clause 10. Mr Paul said that if he had read the document and noticed that, he would have rung up the lessors’ solicitor to clarify what it was that was being referred to. He had no recollection of having done so, and there is no note on his file or other evidence that he did do so.

32 I think it probable that both solicitors thought that clause 6 as drafted gave effect to the plaintiff’s request in Mr Paul’s letter of 28 July 1999, that clause 12 of the lease be varied to provide that the lessor be responsible for all maintenance of all structural parts of the property, to include but not be exclusive of all internal and external walls or flooring, roof guttering, stormwater and the septic system.

33 Mr Scutti gave evidence that he would do the structural work when they got the money. It is not entirely clear what Mr Scutti was referring to. However the defendants did not contend that their obligation to carry out structural work was limited by any notion of their having the financial resources to carry out the work. Counsel for the defendants frankly said that the defendants did not contend it to be a condition of any agreement that money be available. Likewise, Mrs Scutti denied that the defendants said that they would not be able to do all the work at once because it would be too expensive. She explained the defendants’ position as follows:

“ We were saying when the roof was finished, then we would look at what needed to be worked on next. We would go over there and do it. We didn’t want to have to send a builder. We would get the money and then do the repairs, rather than pay a builder to go in and just instantly do all the work. It was agreed that we would work towards getting it done. If there were any of the building parts that John [Mr McGinn] could help out with in his trade, then we would look at including him to do some of the work and off set it.
…
We wouldn’t have a problem getting the money to go and do the repairs. If the money was available we would do it. If John could help out we would look at it. ”

34 Hence, the defendants have not suggested in their formulation of their responsibilities, that their obligations would be conditional upon the availability of finance.

35 In his oral evidence, Mr Scutti accepted that in July 1999, the building needed work to be done on it in order for it to be safe and in a good condition. He also agreed that in July 1999, he had agreed with Mr and Mrs McGinn that he and his wife would be responsible for the structural repairs and structural maintenance of the hotel. He was asked about structural maintenance and said:

“A. Well I don’t know what you mean, the maintenance; structural maintenance? The structural work, but what is involved is the walls, the roof and the floors.

Q. Right. And that’s all?
A. Exactly.
His Honour:
Q What about gutters and downpipes for example?
A. Yeah, that’s part of the structural … yes.
Parsons:
Q: What about the verandah posts?
A. Yes.”

36 I think it therefore clear that the parties intended and agreed that the defendants should be responsible for carrying out required structural repairs to the demised premises, whatever “structural repairs” might denote. Their obligation was not to be confined to carrying out repairs to the roof, the walls and the floors. They did not intend that the obligation should extend only to those parts of the building essential to its physical integrity, such as the roof, load bearing walls and the foundations.

37 Mr Scutti also agreed that at the meeting Mrs McGinn said that the place should be properly repaired and structurally sound.

38 As I have noted in para 23, Mrs Scutti acknowledged that she intended that structural repairs would be carried out to bring the building into a good condition. At the meeting in July 1999 Mr Scutti said that the defendants would attend to the repairs to put the building back into a good condition. As noted in para 37, he agreed that Mrs McGinn wanted the building to be repaired so that it was in a structurally sound condition. I consider that the composite expression “good and sound” accurately captures the standard to which both parties intended the building should be brought by the structural repairs which the defendants would carry out.

39 There were no discussions about the defendants’ carrying out of structural maintenance, as distinct from structural repairs to keep the building in a good and sound condition. I doubt that there is such a difference. The defendants acknowledge that they were obliged to effect structural maintenance to keep the building in a structurally satisfactory condition.

No Implied Term as to Landlord’s Obligation to Repair

40 The general principle is that there is no implied covenant by a lessor of an unfurnished house or flat, or of land, that it is or shall be reasonably fit for habitation or occupation, and that no covenant is implied that the lessor will carry out repairs. (Duke of Westminster v Guild [1985] 1 QB 688 at 697).

41 Counsel for the defendants referred to the decision of the English Court of Appeal in Barrett v Lounova (1982) Ltd [1989] 1 All ER 351, where the lease contained a covenant by the tenant to carry out inside repairs to leave the inside of the premises and fixtures in good repair, order and condition. Kerr LJ with whom Swinton Thomas J concurred, held that it should be inferred from the obligation imposed upon the tenant to carry out repairs to the inside of the house, that the landlord should carry out necessary repairs to the exterior of the house which if not done would prevent the tenant from being able to comply with its covenant.

42 Barrett v Lounova(1982) Ltd was considered by Balmford J in the Supreme Court of Victoria in Carbure Pty Ltd v Brile Pty Ltd [2002] ANZ Conv R 584, [2002] VSC 272. Her Honour (at [29]), doubted whether it is possible to imply into a simple lease, where there is no relationship between the parties other than that of landlord and tenant, an obligation on the landlord to repair and maintain the structure of the leased premises. Her Honour noted that a number of text writers, including Woodfall, have disapproved of the reasoning in Barrett v Lounova (1982) Ltd. The decision was also criticised in Dowding and Reynolds, The Law of Dilapidations, 3 ed, pp 379-380. In Adami v Lincoln Grange Management Ltd [1998] 1 EGLR 58, Vinelott LJ (with whom the other members of the Court of Appeal agreed), held that Barrett v Lounova(1982) Ltd was to be taken to have been decided on its own special facts. Woodfall concludes that it is probably no longer safe to rely on Barrett v Lounova(1982) Ltd (Woodfall, Landlord and Tenant, Vol 1, para 13.007.2). My principal difficulty with the reasoning in Barrett v Lounova (1982) Ltd is that prima facie the obligation to do that which is necessary to carry out a repairing obligation, would be imposed on he who had that obligation. Further, it is perfectly possible for premises to be leased with neither the lessor nor the lessee having an obligation to carry out repairs, or repairs of a certain kind. (Adami v Lincoln Grange Management Ltd at 61). Even if it were necessary to imply a term as a corollary of a tenant’s obligation to repair the inside of a building, that the landlord would effect such repairs to the outside of the building which, if not done, would prevent the tenant from keeping the inside in repair, that is not a term for which either party contends in the present case.

43 I do not consider that the obligation for which the plaintiff contends can be implied. It is therefore necessary to consider the plaintiff’s rectification case. Even if I am wrong in my conclusion that there is no implied term as the plaintiff contends, but the requirements for rectification are established, an order may be made for rectification of the instrument for more abundant caution. (Standard Portland Cement Co Pty Ltd v Good [1982] 2 NSWLR 668; Sipad Holding ddpo v Popovic (1995) 61 FCR 205 at 213).

44 There is clear and convincing evidence that the parties had a common intention which persisted up to (and beyond) the signing of the Variation of Lease that the defendant should be responsible for carrying out all necessary structural repairs to bring the premises to, and keep the premises in, a good and sound structural condition. Both parties understood, mistakenly, that the Variation of Lease included a clause to give effect to that intention as requested by the solicitors for the plaintiff.

45 It is necessary that the parties had a common intention such that the Court can conclude with appropriate clarity, both the substance and the detail of the precise variation which needs to be made to the wording of the instrument. (Bush v National Australia Bank Ltd (1992) 35 NSWLR 390 at 407; Commonwealth Bank of Australia v Cluness (1997) 8 BPR 15,467 at 15,470; Muriti v Prendergast [2005] NSWSC 281 at [130]-[137]). The parties in this case had a common intention that within a reasonable time, the defendant should carry out structural repairs to the property necessary to bring it to and keep it in a good and sound condition. I am satisfied that the requirements for rectification have been established and that the instrument of Variation of Lease should be rectified accordingly.

46 Rectification operates retrospectively. The Variation of Lease is to be taken as always having included the lessor’s covenant to effect structural repairs.

47 There is implied in a landlord’s covenant to repair, that it is to repair on notice. The landlord has an implied licence to enter on the premises for the purposes of performing its covenant to repair. (Granada Theatres Ltd v Freehold Investment (Leytonstone) Ltd [1959] 1 Ch 592 at 608). As Jenkins LJ said in that case (at 608):

“ The parties are under a duty to each other to act reasonably. It behoves the landlord, who is in breach of his covenant, to be diligent in the remedying of such breach. He is not entitled to keep the tenant waiting indefinitely and then complain if the tenant ultimately decides to do the work himself. On the other hand, he must be reasonable in the exercise of his licence to enter and (as I think) give the tenant sufficient notice of his intention to enter, and information as to the nature and extent of the work he proposes to carry out. On his part, the tenant must not unreasonably obstruct the landlord in the exercise of his right of entry for the purpose of doing the work, or take the matter out of the landlord’s hands by doing the work himself before the landlord has had a reasonable opportunity of doing so. ”

Determination of Whether the Covenant Has Been Breached

48 It was submitted for the plaintiff that I ought to make findings that in at least one respect the defendant was in breach of its covenant to effect structural repairs. However the evidence on the question of breach is not complete. I have not ruled on the admissibility of Mr Kennard’s affidavit to which objection was taken on the ground of its late service, and neither he nor Mr Kendall has been cross-examined. I do not think I could safely say that there were any alleged breaches of the covenant to repair in respect of which the evidence was complete. It was submitted by counsel for the plaintiff that whilst the Court had insufficient evidence in order finally to determine the extent of the breaches and that it was therefore “inappropriate to embark on that question”, the Court could nonetheless determine that there had been some breach. Counsel submitted that the report of Mr Kennard of 23 June 2004, which the defendants tendered was itself sufficient to show that as at 31 May 2004, the date of Mr Kennard’s inspection, the defendant was in breach of its obligations to effect structural repairs. However, whilst there is evidence that the defendant was in breach of the covenant, I am not in a position to make findings as to whether the defendant is in breach of the covenant until the evidence on breach is complete. Nor do I see any advantage in doing so. Before a plaintiff is entitled to an enquiry as to damages, he must show that he has suffered some damage as a result of an established breach. The plaintiff is not yet in that position.

49 The question is whether there should be a reference to an appropriate expert to enquire into and report on the question of whether the defendant is in breach of the covenant which I have found was part of the agreement between the parties and which should be included in the Variation of Lease, or whether the Court should decide those questions for itself and then refer to an appropriate expert, issues relating to the quantum of damage and the extent of repairs which may be needed in order to rectify any defects which are the result of the defendants’ being in breach of their covenant to repair.

50 Some submissions have been made about that. Some evidence has already been adduced on the question of whether the defendants are in breach of their covenant to make structural repairs. Findings on breach may depend on the meaning to be given to the expression “structural repairs”, (see generally, Dowding and Reynolds, Dilapidations, The Modern Law and Practice, 3 ed, 7.30-7.33). If possible, I should determine whether any, and if so what, breaches of the lessor’s covenant to effect structural repairs have been established, and whether the plaintiff has made good its claim for recoupment. However, I will hear counsel further on the matter, as the course to be taken may depend upon the likely length of a further hearing on those questions, and the availability of counsel, witnesses and the Court.

Defendant’s Cross-Claim For Rent

51 From the beginning of 2004, the plaintiff has not paid rent owing to what it contends are the defects in the premises and the defendants’ breach of its obligations to carry out structural repairs. The plaintiff claims to be entitled to set off against its liability for rent an amount for damages, as yet unquantified, which it claims the defendants are liable to pay to it as a result of the alleged breach of their covenant to effect repairs. The plaintiff also claims that it is entitled to deduct from the rent otherwise payable by it, the value of work and labour which it has performed on the premises and money spent to effect these repairs. It also contends that the defendants are charging more for rent than they are entitled to charge, and that it is entitled to deduct overpayments.

52 The defendants claim to be entitled to charge an increase in the amount of rent attributable to movements in the Consumer Price Index, whereas the plaintiff says that the rent payable remains that which was payable when it took possession. The amount claimed by the defendants as at 23 March 2005 was $58,814.51 together with interest of $6,835.14 at the rate prescribed under the lease. The plaintiff submits that even if it is found to be liable for the amount claimed, or some lesser amount, and judgment is entered, there should be a stay of enforcement of the judgment until the determination of the balance of the plaintiff’s claims.

53 Clause 2(a) of the lease provides:

“ The lessees hereby covenant with the lessors:
(a) To the full effect of the Covenants next hereinafter shortly noted as the same are set forth in words at length in the second column of Part 2 of the Fourth Schedule to the Conveyancing Act, 1919, as amended save only as otherwise hereby extended varied or modified: -
(1) That the Lessee’s covenant with the Lessor’s to pay rent.
…. ”

54 The long form of covenant incorporated into the lease is that:

“… The said lessee ……hereby for himself or herself and for his or her heirs, executors, administrators, and assigns, covenant with the said lessor that the lessee, the lessee’s executors, administrators or assigns, will, during the said term, pay unto the said lessor, the lessor’s executor, administrators, or assigns the rent hereby reserved, in manner herein -before mentioned, without any deduction whatsoever, other than any deduction which the lessee is by any Act of Parliament entitled to make.”

55 By Schedule Two to the lease, the parties agreed that the annual rental for the first and second years of the term should be $35,100 payable by equal monthly instalments of $2,925 in advance. The rental for the third year of the term and for each succeeding year is to be the rental determined in accordance with the provisions of clauses 19 and 20 of the lease. Clause 19(a) provided:

“19(a) The annual rental payable for the third year of this Lease and for each succeeding year of the demised term shall be the rental agreed to by the parties or failing agreement shall be the amount of rental payable in respect of the preceding year of the demised term increased annually as represents the percentage increase in the consumer price index (all groups Sydney) during the preceding year of the demised term. Any necessary adjustment of rental shall be made by the parties upon the relevant data being made available and shall be backdated to the anniversary of the commencement of the lease and shall not be affected by any waiver, indulgence or delay on the part of the lessors.”

56 Clause 20 provides that the annual rent from time to time should not be less than the annual rent for the preceding year. Clause 2(m) provides that if the rent is in arrears for more than fourteen days, interest is payable at the rate of 18% per annum on the arrears of rent.

Rent Increases

57 The first issue is whether the rent which is payable has been increased according to movements in the Consumer Price Index. The plaintiff submitted that it had not, as no attempt had been made by the defendant to seek the plaintiff’s agreement to a new rent.

58 When the plaintiff took the assignment of lease, the lease was already in its tenth year. In accordance with clause 19(a), the lease for each succeeding year was to be the amount of rent agreed to by the parties, or failing agreement, the amount of rent payable in respect of the preceding year increased by the change to the Consumer Price Index. It was submitted for the plaintiff that the rent could only be increased according to movement in the Consumer Price Index if the parties had first attempted to agree on a figure for rent for a relevant year and had failed to reach agreement. The plaintiff said that the defendants never sought its agreement to an increase in rent, and hence there was never a failure to agree on rent which could trigger the default provision in clause 19(a) whereby the rent would be increased in accordance with changes to the CPI. Instead, the defendants had simply purported to charge rent increased in accordance with changes to the CPI.

59 I do not accept this submission. The rent for each year of the term is not to be less that the rent for the preceding year, but is otherwise to be the rental agreed to by the parties. It is open to either party to seek to reach agreement upon the rental for each new year of the term. The expression “failing agreement” deals with all cases in which the parties have not reached agreement upon the rental for a new year. They may have failed to reach agreement because one party made an offer which the other rejected. They may have failed to reach an agreement because one party made an offer and the other did not respond. They may have failed to reach agreement because neither party made an offer. In all such cases, they would have failed to agree on the rental for the new year of the term. In that event, the rental is increased by the movements in the Consumer Price Index.

60 The parties are agreed upon the defendants’ calculation of the rental payable on this view of the construction of clause 19.

Set-off and Recoupment as a Defence to Non-Payment of Rent

61 The next question is whether the plaintiff can set off its claim for damages against the rent payable by it, or rely upon a right of recoupment to claim the value of work done by it and money spent by it to attend to repairs which it claims are the defendants’ responsibility. Subject to any contrary agreement between the parties, a lessee, faced with a demand for unpaid rent, may be entitled to plead an equitable set-off as a defence to the lessor’s claim, if the lessee is entitled to damages for the lessor’s breach of its covenant to repair, (British Anzani (Felixstowe) Ltd v International Marine Management(UK) Ltd [1980] QB 137). The plaintiff has not yet established its right to damages or recoupment, but it clearly has genuine claims. The defendant says that even if the plaintiff establishes its claims, it is still liable to pay rent without any deduction.

Does the Covenant to Pay Rent “Without Any Deduction Whatsoever” Exclude the Right of Set-off or Recoupment?

62 This question is one of some difficulty, upon which the authorities are divided. A right of recoupment may stand in a different position from an equitable set-off. Where a tenant himself carries out repairs which the landlord ought to have carried out, his expenditure is often treated as if it had been a direct payment of rent, such that credit for the cost of repairs in arriving at the figure for outstanding rent is a matter of recoupment, rather than deduction. (Lee-Parker v Izzet [1971] 1 WLR 1688 at 1693; Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 1 WLR 501 at 507; contra Batiste v Lenin (2002) 10 BPR 19,441 at 19,468-19,469, [102]-[105]; but on appeal see Batiste v Lenin (2003) 11 BPR 20,403 at [49].)

63 The authorities on the question of whether a promise to pay rent without deduction excludes a right of equitable set-off, are also at variance. (See for example Citibank Pty Ltd v Simon Fredericks Pty Ltd [1993] 2 VR 168 at 175; Batiste & Ors v Lenin, supra; Debonair Nominees Pty Ltd v J & K Berry Nominees Pty Ltd (2000) 77 SASR 261 at 271, [43], and compare Waite, Disrepair and Set-Off of Damages Against Rent: The Implications of British Anzani [1983] Conv 373; Waite, Repairs and Deduction from Rent, The Conveyancer and Property Lawyer [1981] 45 Conv (N.S.) 199; Lee-Parker v Izzet [1971] 1 WLR 1688; Connaught Ltd v Indoor Leisure Ltd [1994] 1 WLR 501; Re Partnership Pacific Securities Ltd [1994] 1 Qd R 410 at 424-425; Grant v NZMC Ltd [1989] 1 NZLR 8; Derham, The Law Relating to Set-Off, 3 ed, paras 5.82-5.85).

64 None of these authorities was referred to by counsel in their submissions, which on this question were very brief.

65 The question is an important one. I do not think I ought to decide it without properly informed argument. It may well be that I should follow the decision of Bryson J (as his Honour then was), in Batiste v Lenin at [105] where his Honour said that the words “without deduction” prevent the lessee from relying on rights or claims to set-off, recoup or otherwise withhold payment of part of the rent. On the other hand, his Honour may not have had the benefit of a full citation of authority. Further, the Court of Appeal expressed the view, albeit obiter, that it was not persuaded that such a clause could defeat a lessee’s right of recoupment.

66 As the proceedings will need to be listed for further hearing before me in any event, I will defer deciding this question until I have heard further submissions on it.

67 Accordingly the only order which I make at this stage is that the Variation of Lease, being registered dealing 9121251 entered into by the plaintiff and the defendants, be rectified by including therein a term that:

“The Lessor must effect structural repairs within a reasonable time to put the demised premises in a good and sound structural condition, and effect any structural repairs necessary to keep the demised premises in a good and sound structural condition.”

68 The plaintiff will be entitled to its costs in relation to that issue, but I will not make an order for costs at this stage whilst the other issues in the proceedings remain outstanding. I will hear counsel on when and how the remaining issues are to be disposed of.

******