Dee-Tech Pty Ltd v Neddam Holdings Pty Ltd

[2010] NSWCA 374

New South Wales

Court of Appeal

CITATION:	Dee-Tech Pty Ltd & Anor v Neddam Holdings Pty Limited [2010] NSWCA 374 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	1 December 2010
JUDGMENT DATE:	22 December 2010
JUDGMENT OF:	Campbell JA at 1; Young JA at 2; Sackville AJA at 3
DECISION:	1. Appeal allowed. 2. Set aside Orders 1, 2, 6, 7, 8, 11 and 12 made on 17 December 2009. 3. Note that the setting aside of Order 2 made on 17 December 2009 is subject to the appellants' counsel giving to the Court the usual undertaking as to damages. 4. Order that, save for Orders 3, 4, 5, 9, 10 and 11 made on 17 December 2009, the amended cross-claim filed by the respondent on 19 December 2008 be dismissed. 5. Declare that the first appellant validly exercised the option to renew Registered Lease No 6399422Q, as varied by the Variation of Lease dated 28 May 2002, so as to create a term of three years commencing on 1 February 2008 and terminating on 31 January 2011. 6. No order is made as to the costs of the appellants’ claim or of the respondent’s cross-claim in the proceedings determined by the orders made on 17 December 2009. 7. Order the respondent to pay 20% of the appellants’ costs of the appeal, including reserved costs. 8. Remit the proceedings to the Equity Division for determination of any outstanding issues in the appellant’s statement of claim. 9. Direct that the costs of any further proceedings be determined by the Equity Division. [The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
CATCHWORDS:	LANDLORD AND TENANT - option to renew a registered lease for a three-year term – option exercised – landlord served a notice under s 129 of the Conveyancing Act 1919 (NSW) alleging breaches of its renewed lease – whether landlord had terminated lease – whether landlord had made an unequivocal demand for possession or communicated unequivocally that the lease was at an end - COSTS - neither party identified correct issue at trial – appropriate cost orders where the appellants succeeded on a point not taken at trial
LEGISLATION CITED:	Conveyancing Act 1919 (NSW)Real Property Act 1900 (NSW)
CATEGORY:	Principal judgment
CASES CITED:	Consolidated Developments Pty Ltd v Holt (1986) 6 NSWLR 607 Dee-Tech Pty Ltd v Neddam Holdings Pty Ltd (No 2) [2009] NSWSC 1355 Dee-Tech Pty Ltd v Neddam Holdings Pty Ltd [2010] NSWCA 151 Dee-Tech Pty Ltd v Neddam Holdings Pty Ltd [2010] NSWCA 290 Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd [2008] HCA 10; 234 CLR 237 McKinnon v Portelli [1960] SR (NSW) 343; 77 WN (NSW) 49 Natwest Markets Australia Pty Ltd v Tenth Vandy Pty Ltd [2008] VSCA 207; 21 VR 68 Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; 157 CLR 17 Rosa Investments Pty Ltd v Spender Shier Pty Ltd [1965] VR 97 Shevill v Builders' Licensing Board [1982] HCA 47; 149 CLR 620 Vitol SA v Norelf Ltd [1996] AC 800 World Best Holdings Ltd v Sarker [2010] NSWCA 24
PARTIES:	Dee-Tech Pty Limited – First Appellant Bright Star Laundry Pty Limited – Second Appellant Neddam Holdings Pty Limited - Respondent
FILE NUMBER(S):	CA 2007/254642
COUNSEL:	Mr T Alexis SC; Mr D Mackay for the Appellants Mr P Taylor SC, Mr M Moir for the Respondent
SOLICITORS:	Principal Lawyers for the Appellants McDonald Johnson for the Respondent
LOWER COURT JURISDICTION:	Supreme Court
LOWER COURT FILE NUMBER(S):	SC 2447/07
LOWER COURT JUDICIAL OFFICER:	Gzell J
LOWER COURT DATE OF DECISION:	8 December 2009
LOWER COURT MEDIUM NEUTRAL CITATION:	Dee-tech Pty Ltd v Neddam Holdings Pty Ltd (No 2) [2009] NSWSC 1355

- 25 -

CA 2007/254642

CAMPBELL JA
YOUNG JA
SACKVILLE AJA

22 December 2010

DEE-TECH PTY LIMITED & ANOR v NEDDAM HOLDINGS PTY LIMITED

Judgment

1 CAMPBELL JA: I agree with Sackville AJA.

2 YOUNG JA: I agree with Sackville AJA.

3 SACKVILLE AJA: The first and second appellants (“Dee-Tech” and “Bright Star”, respectively) are related companies. Dee-Tech claims to be the lessee of commercial premises at Shop 3, 217 The Entrance Road, Erina, on the Central Coast of New South Wales. Bright Star is a sub-lessee of the Premises from Dee-Tech and conducts a commercial laundry there. The respondent (“Neddam”) is the registered proprietor of the Premises.

4 Dee-Tech was the lessee of the Premises under a registered lease (No 6399422Q) entered into on 28 May 1999 for a term (as events transpired) of five years, commencing on 1 February 2000 and expiring on 31 January 2005. The registered lease, as varied by a Variation of Lease dated 28 May 2002, contained three options to renew, each for a three year term. Dee-Tech claimed that it had exercised the first two options, so as to create successive three year terms. The first commenced on 1 February 2005 and expired on 31 January 2008 (“2005-2008 Lease”), while the second commenced on 1 February 2008 and was to expire on 31 January 2011 (“2008-2011 Lease”). Neither of the two three year leases was registered under the provisions of the Real Property Act 1900 (NSW).

5 The appellants commenced proceedings in the Supreme Court on 24 April 2007. In a statement of claim filed on 7 May 2008, they sought a vaguely worded declaration that “at all material times [Dee-Tech] has validly exercised any option to renew registered lease number 63994Q [sic] (as varied)”. In the alternative, they sought a more precisely worded declaration that Dee-Tech had

“validly exercised the option to renew registered lease number 63994Q [ sic ] (as varied) for a term of three years commencing from 1 February 2008 and terminating on 31 January 2011”.

In the further alternative, the appellants sought an order that Dee-Tech “ be relieved of forfeiture of the lease of the [P]remises ”. Bright Star also sought relief from the forfeiture of its sub-lease.

6 Neddam filed a cross-claim. By an amended cross-claim filed on 19 December 2008, Neddam sought an order against the appellants for possession of the Premises. Neddam also sought an order for rectification of the Variation of Lease, in order to change the date that from which Dee-Tech was required to pay outgoings in respect of the Premises.

7 In a judgment given on 8 December 2009, Gzell J held, in substance, that Neddam was entitled to the relief it sought and that Dee-Tech’s claim for relief against forfeiture of the lease of the Premises should be rejected: Dee-tech Pty Ltd v Neddam Holdings Pty Ltd (No 2) [2009] NSWSC 1355. On 17 December 2009, his Honour made orders dismissing the appellants’ statement of claim and granting the relief sought by Neddam.

ISSUES ON APPEAL

8 The appellants appeal against the decision of the primary Judge. Their notice of appeal challenged findings by the primary Judge that Dee-Tech had breached Part 5 of the registered lease (relating to the lessee’s obligation to take out insurance policies) and that Neddam had given Dee-Tech a valid notice under s 129 of the Conveyancing Act 1919 (NSW) (“Conveyancing Act”) in respect of the breaches of Part 5 of the registered lease. The appellants also challenged the primary Judge’s findings that Dee-Tech’s breaches were wilful and deliberate and that it should not be granted relief against forfeiture of the lease.

9 The parties filed extensive written submissions on the appeal. In the course of oral argument, however, it became apparent that the parties at trial overlooked a critical issue. The parties seem to have assumed that, if Dee-Tech could be shown to have breached an essential term of the registered lease and if Neddam had given a valid s 129 notice, the 2005-2008 Lease (or perhaps the 2008-2011 Lease) had been validly terminated by Neddam. It was presumably on this basis that the appellants sought, as an alternative remedy in the proceedings before the primary Judge, relief against forfeiture.

10 Members of this Court suggested in argument on the appeal that it was difficult to see how Neddam could be said to have terminated the registered lease or either of the two succeeding three year leases. Mr Alexis SC, who appeared with Mr Mackay for the appellants (neither of whom appeared below) pointed out that Dee-Tech’s written submissions had referred, if only briefly, to the primary Judge proceeding directly to its claim for relief against forfeiture “without considering whether Neddam [had] terminated the lease in accordance with clause 11.5” [reproduced at [21] below]. Mr Alexis also pointed out that Dee-Tech’s submissions in reply had asserted that Neddam had appeared to concede in its written submissions on the appeal that it had not given the notice of termination required by cl 11.5 of the registered lease. Mr Alexis acknowledged, however, that the notice of appeal did not identify this as a ground of appeal and that the written submissions did not develop the point beyond the brief references which I have noted.

11 Mr Taylor SC, who also did not appear below, maintained on behalf of Neddam that the trial had been conducted on the basis that the lease (it was not entirely clear which lease was meant) had been validly terminated. He submitted that Dee-Tech should not be permitted to raise the issue for the first time on appeal.

12 The Court took the view that Dee-Tech should be granted leave to file an amended notice of appeal explicitly raising the issue of whether the 2005-2008 Lease had been terminated by Neddam. The Court took into account that the issue had been adverted to, albeit briefly, in Dee-Tech’s written submissions on the appeal. It also took into account that Neddam, which was seeking an order for possession of the Premises, had neither pleaded nor argued before the primary Judge that any of the leases had been validly terminated and that, presumably in consequence of this omission, his Honour had not addressed the issue.

13 The amended notice of appeal, which was filed after the hearing, included the following ground:

“His Honour erred in failing to determine whether the Respondent had terminated the lease from 1 February, 2005 to 31 January 2008 or the lease from 1 February 2008 to 31 January 2011.”

14 Mr Taylor appreciated at the hearing of the appeal the difficulty that faced his client and did not ask for the amended notice of appeal to be filed before dealing with the point. He submitted that a notice served on Dee-Tech by Neddam’s real estate agent on 26 February 2007 had been effective to terminate the 2005-2008 Lease. Accordingly, so he argued, Dee-Tech’s purported exercise of the option creating the 2008-2011 Lease had been ineffective. Mr Taylor did not contend that Neddam had terminated the 2008-2011 Lease, assuming that the Lease had come into effect.

15 At the conclusion of the oral argument, the Court indicated that it was minded to allow the appeal on the ground that the 2005-2008 Lease had not been validly terminated by Neddam. Mr Alexis and Mr Taylor each made submissions as to the appropriate form of orders, should the appeal be allowed. The parties were given an opportunity to file written submissions on costs. Those submissions were duly received.

LEGISLATION

16 Section 129 of the Conveyancing Act relevantly provides as follows:

“(1) A right of re-entry or forfeiture under any proviso or stipulation in a lease, for a breach of any covenant, condition, or agreement (express or implied) in the lease, shall not be enforceable by action or otherwise unless and until the lessor serves on the lessee a notice:
(a) specifying the particular breach complained of, and
(b) if the breach is capable of remedy, requiring the lessee to remedy the breach, and
(c) in case the lessor claims compensation in money for the breach, requiring the lessee to pay the same,
and the lessee fails within a reasonable time thereafter to remedy the breach, if it is capable of remedy, and where compensation in money is required to pay reasonable compensation to the satisfaction of the lessor for the breach.
(2) Where a lessor is proceeding by action or otherwise to enforce such a right of re-entry or forfeiture, or has re-entered without action the lessee may personally bring a suit and apply to the Court for relief; and the Court, having regard to the proceedings and conduct of the parties under the foregoing provisions of this section, and to all the other circumstances, may grant or refuse relief, as it thinks fit; and in case of relief may grant the same on such terms (if any) as to costs, expenses, damages, compensation, penalty or otherwise, including the granting of an injunction to restrain any like breach in the future, as the Court in the circumstances of each case thinks fit.

…

(8) This section shall not affect the law relating to re-entry or forfeiture or relief in case of non-payment of rent.”

17 Section 128 of the Conveyancing Act defines “Lease”, for the purposes of s 129, to include an under-lease and an agreement for a lease where the lessee has become entitled to have his or her lease granted.

THE LEASES

The Registered Lease

18 On 23 November 1999, Dee-Tech entered into a lease with the then registered proprietors of the Premises, Mr and Ms Colmer, for a term of two years commencing on 1 February 2000 at an initial rent of $35,000 per annum. As I have noted, the lease was duly registered and given No 6399422Q. The registered lease contained a single option to renew for a term of three years.

19 The registered lease contained no provision for Dee-Tech to pay outgoings in respect of the Premises. Item 7 of the registered lease recorded the following:

“ Outgoings Percentage Not applicable.”

20 Part 5 of the registered lease required Dee-Tech to take out and keep current, in the names of Dee-Tech and the lessors, insurance policies providing coverage, among other things, for public liability, plate glass breakage and damage or destruction to the “Lessee’s Property”.

21 Part 11 of the registered lease was headed “ENDING OF THE LEASE”. It included the following provisions:

“ Termination
11.5 The Lessor is entitled to terminate this Lease by giving the Lessee notice or by re-entry, with force, if necessary, if:

11.5.1 the Lessee has repudiated this Lease, or is in breach of an essential term of this Lease; or

11.5.2 Rent or any other money due to the Lessor under this Lease is not paid within fourteen (14) days of the due day; or

11.5.3 the Lessee has failed to comply with a notice given by the Lessor to the Lessee under Section 129 of the Conveyancing Act 1919 as provided in that section.
11.6 Essential terms of this Lease include the Lessee’s obligations in … Parts 5 and 9.
11.7 The Lessor is entitled to make other terms essential terms by giving fourteen (14) days notice to the Lessee.
11.8 If this Lease is terminated by the Lessor, the Lessor is entitled to recover damages from the Lessee for any loss the Lessor suffers and costs the Lessor incurs over the whole of the term including the Lessor’s loss of the benefit of the Lessee performing the Lessee’s obligations under this Lease from the day this Lease is terminated until the Terminating Day.
…
Vacation of Premises
11.12 Unless the Lessor is obliged to grant a new lease of the Premises to the Lessee, the Lessee must vacate the Premises no later than:

11.12.1 …

11.12.2 the day this Lease is terminated by a notice given to the Lessee by the Lessor; or

11.12.3 the day any notice given under clause 11.11.2 or clause 11.21.1 expires.”

22 Clause 11.11.2 provided that where a monthly tenancy was created by a holding over, it could be terminated by one month’s notice. Clause 11.21.1 dealt with termination of a weekly tenancy which could be created in circumstances not relevant in this case.

The Variation of Lease

23 By a Variation of Lease executed on 28 May 2002, the term of the registered lease was increased to five years, so as to expire on 31 January 2005. The Variation of Lease provided for three options to renew, each for a term of three years. Each new lease was to have the same terms as the registered lease, subject to necessary adjustments to cover such matters as the options. The Variation of Lease was duly registered.

24 The Variation of Lease provided that:

“In the lease commencing 1 February 2006 Item 7 [of the registered lease] delete the words ‘Not Applicable’ and replace with the words ‘the Lessee shall pay 44.6% of all reasonable outgoings …” (Emphasis added.)


The effect of this provision, if read liberally, was that Dee-Tech, if it exercised the first option to renew so as to create a lease for a term of three years from 1 February 2005, would be obliged to pay a proportion of outgoings as from 1 February 2006 (that is, from a date one year after the commencement of the 2005-2008 Lease).

Sale of the Premises

25 On 15 September 2002, the Colmers entered into a contract of sale of the Premises to Neddam. The sale was completed on 21 October 2002 and Neddam became registered as the proprietor of the Premises subject to the registered lease as varied. (I refer to the registered lease as varied as the “Registered Lease”).

Exercise of the First Option

26 On 5 October 2004, Dee-Tech purported to exercise the first option to renew contained in the Registered Lease. Neddam did not accept that the option had been validly exercised. Dee-Tech then commenced proceedings in the Equity Division of the Supreme Court against Neddam claiming that it had validly exercised the option.

27 On 31 May 2005, the Supreme Court made orders by consent resolving the proceedings. The Court:

declared that Dee-Tech had validly exercised the option to renew for a term of three years commencing on 1 February 2005 as contained in the Registered Lease;

declared that the covenant for renewal ought to be specifically performed; and

ordered Neddam to execute all documents and do all things necessary to carry the covenant into effect.

28 It appears that the last order was never implemented or enforced and that, in consequence, the 2005-2008 Lease was never registered. There was no dispute between the parties, however, that it was effective as an equitable lease.

Notices Under s 129 of the Conveyancing Act

29 During the currency of the 2005-2008 Lease, Neddam served a number of notices on Dee-Tech under s 129 of the Conveyancing Act alleging breaches of the lease. Reference need only be made to two such notices.

30 The first was served on 22 September 2006 and alleged arrears of outgoings and rental adjustments totalling $17,053.72. The primary Judge found that the notice “was good”. (Section 129(8) of the Conveyancing Act provides that s 129 does not affect the law relating to forfeiture for non-payment of rent, but nothing presently turns on this.)

31 The second s 129 notice was served on 1 February 2007. It claimed that Dee-Tech had breached Part 5 of the Registered Lease by failing to take out and keep the required insurance policies. The notice required Dee-Tech to remedy the breach, by taking out and keeping current the policies of insurance specified in Part 5 of the Registered Lease. The primary Judge found (at [107]) that this notice “was effective”.

Correspondence

32 On 26 February 2007, Neddam’s real estate agent, LJ Hooker Commercial Central Coast (“LJ Hooker”) wrote to Dee-Tech. The letter was headed “NOTICE TO VACATE THE PREMISES” and stated as follows:

“The Landlord’s solicitor has advised us that you are in breach of your Lease.
We also bring to your attention that your current arrears stand at $24,584.51 .
Mr Slattery [a person involved in the management of Dee-Tech], on Thursday 21 ^st February 2007, confirmed that you are in receipt of all outstanding Tax Invoices.
This is a considerable amount of money and the landlord is no longer willing to accept this situation.
Please note as per your lease, specifically Clause 11.5.2, 4.3, you are in breach of your lease and we have been instructed to terminate this current lease.
We have also been advised that you have been requested to vacate the premises on or before the 1 ^st May 2007 by Cameron & Myers Solicitors, who represent the Landlord.” (Emphasis in original.)

33 On 2 April 2007, LJ Hooker wrote a letter to Dee-Tech headed “NOTICE OF INTENTION TO LOCK OUT DUE TO NON-PAYMENT OF ARREARS”. The letter was in the following terms:

“According to our records, you are in breach of your lease.
Your current arrears stands at $17,846.42 .
I now have had strict instructions from the owner that if the outstanding arrears are not received (in cash or bank cheque ONLY ) by Monday 16 April, 2007 at 2.00pm , we are to take possession of the premises on their behalf as is their right. Please note that we will not be contacting you prior to this date and will be making arrangements directly with the landlord and locksmith to take possession on that date.
Also note that this Notice of Intention to Lock Out stands
until all outstanding rental and outgoing arrears are paid.
Failure to comply will result in a representative from this office accompanied by a locksmith and a security guard, attending the property. The locks will be changed and you will have to contact our office to gain access to remove both your stock and possessions…”. (Emphasis in original.)

The Present Proceedings

34 On 24 April 2007, Dee-Tech commenced the present proceedings by summons. The summons sought an order relieving Dee-Tech from forfeiture of its lease of the Premises. It also sought an interlocutory order restraining Neddam from taking or attempting to take possession of the Premises or otherwise terminating Dee-Tech’s lease. As we have noted, Dee-Tech filed a statement of claim in the proceedings on 7 May 2008.

35 On 30 April 2007, Neddam consented to interim orders which restrained it from taking possession of the Premises or otherwise terminating Dee-Tech’s lease. The primary Judge found (at [111]) that the consent orders did not waive Neddam’s right to act on Dee-Tech’s “breach of contract”.

Exercise of the Second Option

36 On 6 October 2007 Dee-Tech gave notice to Neddam that it exercised the option pursuant to the 2005-2008 Lease “which new lease is to commence on 1 February 2008”. Neddam did not serve any notice on Dee-Tech under s 133E of the Conveyancing Act (which provides that certain breaches of a lease by a lessee do not affect the exercise of an option, unless the lessee serves a notice specifying the breach and advise the lessee of the right to apply for relief against the effect of the breach in relation to the exercise of the option).

37 Neddam accepted an argument on the appeal that if it had not terminated the 2005-2008 Lease, Dee-Tech had validly exercised the option so as to create the 2008-2011 Lease.

THE PROCEEDINGS AT FIRST INSTANCE

The Relief Claimed

38 Dee-Tech’s statement of claim in the present proceedings was filed on 7 May 2008. By this time, the 2005-2008 Lease, if otherwise valid, had expired by effluxion of time. The relief sought by Dee-Tech, as I have observed, included a declaration that it had validly exercised the option to renew the Registered Lease for a term of three years commencing on 1 February 2008. The claim for relief from forfeiture, made in the alternative, did not identify the lease that had been forfeited or the basis on which relief against forfeiture was sought.

39 Neddam’s amended cross-claim sought, in addition to an order for possession and consequential relief, rectification of the Variation of Lease, so that the date from which Dee-Tech was required to pay outgoings under the 2005-2008 Lease was amended to 1 February 2005 (the date of commencement of the 2005-2008 Lease) rather than 1 February 2006.

40 It is not clear from the amended cross-claim why, even if the Variation of Lease was rectified in the manner claimed by Neddam, it was entitled to any relief other than an order that Dee-Tech simply pay any arrears of outgoings. In particular, the cross-claim did not plead that Neddam had terminated the 2005-2008 Lease by reason of the non-payment of outgoings or any other default on the part of Dee-Tech. Nor did it plead that Dee-Tech’s exercise of the option on 6 October 2007 to create a second three year term (that is, the 2008-2011 Lease) was not valid. In these circumstances, the basis on which Neddam pursued its claim for possession of the Premises before the primary Judge is not clear.

41 Similarly, it is not clear why Dee-Tech chose to argue that it was entitled to relief against forfeiture of its lease (presumably the 2005-2008 Lease). On the pleadings, it was open to Dee-Tech simply to contend that the 2005-2008 Lease had never been terminated and that it had validly exercised the second option to renew. On this basis, it would have been entitled to rely on the 2008-2011 Lease as an unregistered lease enforceable by specific performance.

THE PRIMARY JUDGMENT

Reasons

42 The primary Judge first addressed Neddam’s claim for rectification of the Variation of Lease. He found (at [59]) that Neddam had made out its claim and that the Variation of Lease should be rectified by substituting “1 February 2005” for “1 February 2006” as the date for Dee-Tech to commence paying the prescribed percentage of outgoings. His Honour also found (at [66]) that, by reason of the Variation of Lease (as rectified), the parties intended that Dee-Tech would pay the prescribed percentage of outgoings and that this was to be an essential term of the lease. There is no challenge to these findings.

43 As I have noted, the primary Judge found (at [80], [107]), that the notices under s 129 of the Conveyancing Act given on 22 September 2006 and 1 February 2007 were “effective”. It is clear, however, that his Honour did not mean by these findings that the notices were effective to terminate the 2005-2008 Lease.

44 The primary Judge observed (at [109]) that cl 11.6 of the Registered Lease defined the essential terms of the Lease to include Part 5 (relating to insurance policies). He noted that the stipulation by the parties of what are the essential terms of a lease should be respected. It followed (at [110]) that Neddam:

“irrespective of any common law was entitled to exercise its contractual right to terminate the lease by re-entry or notice for breach of an essential term upon compliance with the Conveyancing Act , s 129, or for Dee-Tech’s failure to comply with the notice.´ (Emphasis added.)

45 His Honour pointed out (at [111]) that the restraining orders made on 30 April 2007 prevented Neddam from taking possession of the Premises terminating the lease. He also observed (at [119]) that:

“Neddam has been prevented from terminating the lease. If the injunction is lifted , and subject to the question of relief from forfeiture, Neddam will be in a position to terminate the lease by re-entry.” (Emphasis added.)

46 The primary Judge stated (at [121]) that Dee-Tech was in arrears of outgoings contributions from 1 February 2005 to 31 January 2006, but that it was “not apparent how much, if any, is presently owed”. In view of deficiency in the accounting system maintained by Neddam’s agent, his Honour considered (at [122]) that the appropriate course was to order a taking of the account of moneys due to Neddam under the lease. He did not specify which lease he was referring to.

47 The primary Judge then turned to the issue of relief against forfeiture for non-payment of rent, although he did not explain why it was necessary to consider the issue. His Honour concluded as follows (at [134]-[135]):

“134 The history of persistent breaches of the terms of this lease; the wilful nature of the refusal to comply with Pt 5 of the lease; the absence of any explanation for the failure such as ignorance, inadvertence, accident or mistake; the absence of any action on the part of Neddam contributing to the failure; and the absence of Dee-Tech’s recognition of the error of its ways lead me to the view that it is not unconscientious for Neddam to exercise its contractual right of re-entry and there is no need to intervene to avoid injustice.
135 I reject the claim for relief from forfeiture.”

Orders Made by the Primary Judge

48 The primary Judge:

dismissed the statement of claim (Order 1);

vacated the injunction granted on 30 April 2007 (Order 2);

made orders and declarations giving effect to his findings on rectification (Orders 3-6);

ordered the appellants to give Neddam possession of the Premises and granted leave to Neddam to issue a writ of possession forthwith (Orders 7-8);

directed that an account be taken of the amounts due by Dee-Tech under the Registered Lease as rectified (Orders 9-11);

ordered the appellants to pay 80% of Neddam’s costs of the proceedings (Order 12); and

vacated an order that Neddam pay one third of the appellants’ costs of an application for security for costs determined by the Registrar (Order 13).

REASONING

49 For the reasons that have been explained, the only issue that was addressed in oral argument on the appeal was whether Neddam had terminated the 2005-2008 Lease. Mr Taylor submitted that, because Neddam had already terminated the 2005-2008 Lease, Dee-Tech’s purported exercise of the second option conferred by the Registered Lease was ineffective to create the 2008-2011 Lease.

50 Mr Taylor, as I understood his submissions, contended that:

by the date LJ Hooker sent the letter of 26 February 2007 (reproduced at [32] above) to Dee-Tech, it was in breach of an essential term of the 2005-2008 Lease by reason of its failure to take out the required insurance policies and Neddam had served (as the primary Judge found) a valid notice under s 129 of the Conveyancing Act on Dee-Tech in respect of that breach;

the letter of 26 February 2007 constituted a notice terminating the 2005-2008 Lease for the purposes of cl 11.5 of the Registered Lease ( which was incorporated into the 2005-2008 Lease); and

since Dee-Tech was in breach of an essential term of the 2005-2008 Lease and had failed to comply with the notice under s 129 of the Conveyancing Act , the notice was effective to terminate the 2005-2008 Lease.

51 The law of landlord and tenant developed distinctive principles relating to the termination of leases that are explicable only by reference to historical considerations. As Sholl J explained in Rosa Investments Pty Ltd v Spender Shier Pty Ltd [1965] VR 97, at 99ff, it was originally necessary, in order to forfeit a lease for breach of covenant, for the landlord physically to re-enter the leasehold premises. Later the common law recognised that the writ commencing an action of ejectment or, after procedural reforms of the nineteenth century, the action for recovery of possession of land, could have the same effect as an actual re-entry. However, in order for a writ to be equivalent to re-entry it had to make an unequivocal demand for immediate possession: see McKinnon v Portelli [1960] SR (NSW) 343, esp at 350, per Myers J..

52 There has been some disagreement in Australia as to whether the common law principles recognised that a lease, if appropriately worded, could be forfeited by service of a notice rather than by re-entry or its equivalent. See Consolidated Developments Pty Ltd v Holt (1986) 6 NSWLR 607, at 619-620, per Young J (and cases cited there); Rosa v Spender Shier, at 99-105. If a notice could be used to effect a forfeiture, it had to amount to a demand for immediate possession of the premises: Rosa v Spencer Shier, at 105.

53 In Australia, since the decisions of the High Court in Shevill v Builders’ Licensing Board [1982] HCA 47; 149 CLR 620 and Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; 157 CLR 17, the general principle is that ordinary principles of contract law are applicable to contractual leases. Thus in Progressive Mailing House v Tabali, at 29-30, Mason J rejected the view expressed in Rosa v Spencer Shier that at common law a re-entry is necessary to forfeit a lease unless dispensed with by contract. His Honour considered that the better view is that contractual principles apply to leases and that, accordingly, re-entry is necessary to terminate a lease only where the parties expressly stipulate that re-entry is required.

54 In Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd [2008] HCA 10; 234 CLR 237, the Court summarised (at 259 [58]) the principles, in the context of a claim by a landlord for loss of bargain damages following termination of a lease:

“Save for any applicable statutory requirements or rules of law, there is no reason in law why general contractual principles do not apply to leases in this respect. Under general contractual principles, an innocent promisee can terminate the contract, and recover loss of bargain damages, where there is repudiation, or a fundamental breach, or a breach of condition - ie a breach of an essential term. And under these principles it is possible by express provision in the contract to make a term a condition, even if it would not be so in the absence of such a provision - not only in order to support a power to terminate the contract, which the Lessee concedes, but also to support a power to recover loss of bargain damages.” (Citations omitted.)

55 It follows from the principles summarised in Gumland that it is open to the parties to a lease to stipulate that a particular term should be regarded as essential, even though it might not otherwise be so characterised. A breach of such a term will constitute a breach of a fundamental term of the lease, allowing the innocent party to accept the breach and terminate the lease: Shevill, at 627, per Gibbs CJ; Natwest Markets Australia Pty Ltd v Tenth Vandy Pty Ltd [2008] VSCA 207; 21 VR 68, at 77-78 [38]-[40].

56 The general rule is that an election to terminate a contract for repudiation or fundamental breach must be communicated by an unequivocal act or statement that the innocent party is treating the contract as at an end: Vitol SA v Norelf Ltd [1996] AC 800, at 810-811, per Lord Steyn, quoted with approval in World Best Holdings Ltd v Sarker [2010] NSWCA 24, at [69], per Handley AJA (with whom Tobias and Campbell JJA agreed). World Best was itself a case involving termination of a lease, so that it is clear that the general rule applies to leases. (World Best also held that, before a lessor can terminate a lease by reason of breach of a term deemed “essential”, it is necessary to comply with s 129 of the Conveyancing Act. That requirement was held to be satisfied in the present case, since the primary Judge found that Neddam served a valid s 129 notice on Dee-Tech on 1 February 2007.)

57 Clause 11.5 of the registered Lease, which applied to the 2005-2008 Lease, permitted Neddam to terminate the lease by giving notice or by re-entry, if any one of three conditions was satisfied. The conditions included breach of an essential term (such as Part 5 of the Registered Lease), or a failure by Dee-Tech to comply with a notice given under s 129 of the Conveyancing Act.

58 The Registered Lease specified requirements for service of a notice and permitted a notice given by a party to be signed by that party’s solicitor (cll 13.1, 13.4). The Registered Lease did not, however, specify the content of any notice terminating the lease by reason of Dee-Tech’s breach of a term deemed to be essential.

59 There is nothing in the language of Part 11 of the Registered Lease to suggest that a notice given under cl 11.5 need not comply at least with the requirements laid down in Vitol v Norelf ([56] above). In the absence of any such indication, cl 11.5 should be read as requiring Neddam, if it is to terminate the lease for breach of a term deemed to be essential, to serve a notice stating unequivocally that it is treating the lease as at an end by reason of Dee-Tech’s breach.

60 This interpretation of cl 11.5 is supported by other provisions in Part 11 of the Registered Lease. Clause 11.12 (see [21] above) draws a distinction between “the day this Lease is terminated by a notice given to the Lessee by the Lessor” and “the day any notice given under clause 11.11.2 or clause 11.21.1 expires”. These provisions suggest that, while a notice terminating a periodic tenancy will expire on a particular date in the future, a notice terminating the Lease under cl 11.5 for breach of an essential term must have immediate effect.

61 The letter of 26 February 2007, upon which Neddam relied, was not in my opinion, an unequivocal statement that Neddam was terminating the 2005-2008 Lease by reason of Dee-Tech’s breach of an essential term. The following considerations militate against any such conclusion:

The letter bore a heading appropriate to the termination of a periodic tenancy, but not to the termination of a lease for breach of an essential term.

The letter did not state that the lease was terminated. It merely said that LJ Hooker had been “ instructed to terminate this current lease ”.

Similarly, the letter did not state that the lease was terminated forthwith, nor that it was terminated at a specific time in the future. It merely recorded that LJ Hooker has been “ advised that [Dee-Tech has] been requested to vacate the [P]remises on or before [1] May 2007 ” by the solicitors representing Neddam.

The letter did not contain any demand for immediate possession of the Premises. On the contrary, it does not contain any demand at all that Dee-Tech yield up possession of the Premises. It merely recorded the solicitors’ request.

The letter did not address the status or legal effect of rental payments that were presumably to be made by Dee-Tech between the date of the notice (26 February 2007) and the date on which the solicitors had previously “ requested ” Dee-Tech to vacate the premises.

62 For these reasons I conclude that the letter of 26 February 2007 was not an unequivocal statement that Neddam was treating the 2005-2008 Lease as at an end. It was therefore ineffective to terminate the 2005-2008 Lease. The Lease, although unregistered, entitled Dee-Tech to possession of the Premises, since it was effective in equity in consequence (if nothing else) of the consent orders made by the Court on 31 May 2005.

63 The challenge by Neddam to Dee-Tech’s exercise of the option so as to create the 2008-2011 Lease therefore fails.

64 I make two additional observations. The first is that Neddam would have faced at least one further obstacle if it was to establish that it had terminated the 2005-2008 Lease. The letter of 2 April 2007 (see [33] above) might well be read as an election by Neddam to maintain the 2005-2008 Lease on foot. If this is so, the letter would amount to a waiver of any pre-existing breach by Dee-Tech and prevent Neddam from relying on any such breach as a basis for terminating the 2005-2008 Lease. This point was not, however, addressed by the parties and it is not necessary to resolve it.

65 The second is that Neddam did not rely on its cross-claim in the present proceedings as having terminated the 2005-2008 Lease nor, for that matter, the 2008-2011 Lease. The amended cross-claim was not filed until after the expiration of the 2005-2008 Lease and we were not taken to the terms of the original cross-claim. An examination of the file revealed that the original cross-claim was filed on 2 May 2008, also after the expiration of the 2005-2008 Lease.

COSTS

66 The appellants submitted that, as the successful parties on the appeal, they should be awarded the costs both of the trial and of the appeal. They argued that it should have been obvious to Neddam from their written submissions that Neddam had to demonstrate that one or other of the leases had been validly terminated if it was to succeed on the appeal.

67 The appellants also drew attention to several interlocutory applications on which, so they argued, supported their application for the costs of the appeal. These were as follows:

A contested application by the appellants for a stay of the primary Judge’s orders requiring them to give up possession of the Premises. On 1 March 2010, Tobias JA stayed those orders. However, further hearings were required to deal with consequential issues. Tobias JA ordered that the costs of 1 March 2010 should be costs in the appeal.

A motion by the appellants to adduce further evidence on the appeal. Neddam asked Handley AJA to deal with the motion, while the appellants asked for it to be referred to the Full Court. Handley AJA referred the motion to the Full Court for determination: Dee-Tech Pty Ltd v Neddam Holdings Pty Ltd [2010] NSWCA 151. His Honour reserved the costs of the motion.

A motion by Neddam to lift the stay. On 1 November 2010, Allsop P declined to lift the stay, but directed the appellants to make certain payments to Neddam: Dee-Tech Pty Ltd v Neddam Holdings Pty Ltd [2010] NSWCA 290.

68 Neddam, in its submissions, adopted a tentative suggestion made by members of the Court on the hearing of the appeal that there should be no order as to the costs of the appeal. It also submitted, however, that the costs orders made by the primary Judge should be left undisturbed.

69 Neddam contended that this Court should take into account a number of matters on the costs issues:

Neddam had succeeded on all issues contested at the trial;

the issue on which the appellants succeeded on appeal was not raised by them at the trial;

all the costs of the appeal, up to the date of the hearing, related to issues which, at trial, had been determined in favour of Neddam;

had the issue on which the appellants succeeded been raised at the trial, the appeal would not have been brought (as Neddam would have issued a fresh s 129 notice in respect of the 2008-2011 Lease); and

the appellants’ success on the interlocutory applications was more limited than they had suggested, particularly as Allsop P found (at [5]) that the appellants, since March 2010, had not paid any outgoings beneficially to Neddam, but had made payments into an escrow account.

70 In my view, Neddam should be ordered to pay 20% of the appellants’ costs of the appeal, including the costs of the interlocutory applications. This limited costs order reflects the appellants’ failure, until the issue was raised by the Court, to identify clearly that the critical question was whether Neddam had terminated either the 2005-2008 Lease or the 2008-2011 Lease. Both parties wasted substantial costs in consequence of the appellants’ failure to identify the critical issue in a timely fashion. On the other hand, the appellants ultimately succeeded over Neddam’s opposition and they had some limited success on the interlocutory applications.

71 Both parties bear responsibility for the failure to address the question of termination of the leases at the trial. Neddam’s pleadings did not allege that the 2005-2008 Lease or the 2008-2011 Lease had been terminated. The appellants were apparently content to resist Neddam’s claim for possession by disputing the various notices given in purported compliance with s 129 of the Conveyancing Act and by seeking relief against forfeiture, without ever identifying clearly which lease had been forfeited and how the forfeiture had come about. The appellants also unsuccessfully resisted Neddam’s claim to rectify the Variation of Lease, an issue that occupied the bulk of the two day hearing before the primary Judge.

72 Given that the appellants failed at trial to identify the issue on which they ultimately succeeded and that they lost all issues that they contested at trial, I consider the appropriate order to be that each party bear its own costs of the trial.

FURTHER PROCEEDINGS

73 Orders should be made declaring that Dee-Tech validly exercised the option for renewal in the Registered Lease so as to create the 2008-2011 Lease. That Lease will expire shortly by effluxion of time.

74 Neddam’s cross-claim will be dismissed, except to the extent that the primary Judge made orders for rectification of the Variation of Lease, declarations as to the proper construction of the Registered Lease and orders for the taking of accounts.

75 It is not clear whether the appellants intend to pursue other relief sought in the statement of claim, such as damages for breaching the covenant for quiet enjoyment contained in the 2005-2008 and 2008-2011 Lease. In order to accommodate that possibility, the proceedings should be remitted to the Equity Division to determine any outstanding issues.

76 The parties informed the Court that there was yet a further dispute between them. This apparently concerns whether Dee-Tech has validly exercised the third option conferred by the Registered Lease so as to create a three year lease of the Premises commencing on 1 February 2011.

77 There is no need to make any directions in relation to the further dispute. However, if the parties wish to formalise that dispute, it should be done in a manner that allows the Equity Division to resolve all outstanding issues between the parties at one hearing.

DISPOSITION

78 One of the orders made by the primary Judge, Order 2, was that the injunction granted against the defendant on 30 April 2007 ([35] above) and extended from time to time be vacated. If Order 2 is set aside, that setting aside is in substance the granting of an interlocutory injunction. It should therefore only be set aside upon the appellants, by their counsel, giving to the court the usual undertaking as to damages. At the hearing, counsel for the appellants indicated a preparedness to give this undertaking.

79 Other orders that were made by the primary Judge, namely Orders 9, 10 and 11, related to the accounting that the primary judge had ordered ([48] above). It is possible that the course of future proceedings between the parties in the Equity Division might make it desirable for these orders to be stayed, so that ultimately a single accounting of all matters in dispute between the parties can occur. I do not think that any specific order of this Court is necessary to cater for that possibility, as once the proceedings are returned to the Equity Division it will be possible for such a stay application to be made there, when and if it might become appropriate.

80 The following orders should be made:

1. Appeal allowed.

2. Set aside Orders 1, 2, 6, 7, 8, 11 and 12 made on 17 December 2009.

3. Note that the setting aside of Order 2 made on 17 December 2009 is subject to the appellants’ counsel giving to the Court the usual undertaking as to damages.

4. Order that, save for Orders 3, 4, 5, 9, 10 and 11 made on 17 December 2009, the amended cross-claim filed by the respondent on 19 December 2008 be dismissed.

5. Declare that the first appellant validly exercised the option to renew Registered Lease No 6399422Q, as varied by the Variation of Lease dated 28 May 2002, so as to create a term of three years commencing on 1 February 2008 and terminating on 31 January 2011.

6. No order is made as to the costs of the appellants’ claim or of the respondent’s cross-claim in the proceedings determined by the orders made on 17 December 2009.

7. Order the respondent to pay 20% of the appellants’ costs of the appeal, including reserved costs.

8. Remit the proceedings to the Equity Division for determination of any outstanding issues in the appellant’s statement of claim.

9. Direct that the costs of any further proceedings be determined by the Equity Division.

**********

02/02/2011 - Typographical errors - Paragraph(s) Paragraph 4-Variation of Lease 28 May 2002 Paragraph 12-"Dee-Tech" (not "Neddam") should be granted leave Paragraph 14-Served on "Dee-Tech" by "Neddam's" real estate agent Paragraph 38-"registered lease" (not "registered loan") Paragraph 60-"other provisions in Part 11" (not "Part 5" Paragraph 66-Typographical error second sentence-remove "the" after "Neddam from"